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JDS Uniphase Corporation (NASDAQ:JDSU)

February 16, 2012 4:30 pm ET

Executives

Michelle Levine Schwartz -

Thomas H. Waechter - Chief Executive Officer, President and Director

Roy Bie - Senior Vice President of Advanced Optical Technologies Products Group

Alan S. Lowe - President of Communications & Commercial Optical Products and Executive Vice President

Unknown Executive -

David W. Heard - Executive Vice President and President of Communications Test & Measurement Business Segment

David W. Vellequette - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Andrew Pollack - Vice President, General Counsel and Secretary

Analysts

William Stein - Crédit Suisse AG, Research Division

James Kisner - Jefferies & Company, Inc., Research Division

Unknown Analyst

Kevin J. Dennean - Citigroup Inc, Research Division

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Todd K. Koffman - Raymond James & Associates, Inc., Research Division

Kimberly Watkins - Morgan Stanley, Research Division

Troy D. Jensen - Piper Jaffray Companies, Research Division

Michelle Levine Schwartz

Okay. Well, hello, everyone, and welcome to JDSU's 2012 Analyst Day. I'd like to welcome everyone here in the room and also those who are on the webcast. And just to note that the live webcast will be available through the Q&A session of our program today. As you can see from our agenda, you'll be hearing from the leaders of our business today, who will be discussing JDSU's strategy and vision for creating shareholder value. Following the formal presentation, we will have a Q&A panel session up here on our platform. We will conclude with a cocktail reception, and at that point you'll have access to the senior leaders of our business at designated tables on both sides of the room. And you'll also have the opportunity to continue to take a look at our products showcased right outside these doors.

Before we get started, I'd like to remind you that certain statements in the presentations constitute forward-looking statements within the meaning of section 27A of the Securities Act of 1934. Forward-looking statements are all statements made by us other than those dealing specifically with historical matters and any statements we make about the conduct of our business or finances up to this moment. All other statements made by us are forward-looking statements which include information provided on future business operations and guidance regarding our future financial performance. Actual results may differ materially from those projected in the forward-looking statements. Factors that could cause actual results to materially differ from those in the forward-looking statements are discussed in the company's Securities and Exchange Commission filings, particularly the Risk Factors section of our Form 10-K filed on August 30, 2011. And also, please note that all numbers are non-GAAP unless otherwise stated.

Our first speaker is Tom Waechter, JDSU's CEO and President. But before that, we're going to show a video. One of the reasons that we're so excited about JDSU is the far-reaching impact of our technology. And this video will illustrate how people depend on JDSU's technology every day.

[Presentation]

Thomas H. Waechter

So good afternoon, and again, welcome to those in the room here joining us in San Francisco, and also those on the webcast. Hopefully that video gives you a little bit better feeling of the depth and breadth of JDSU and the fact that we really focus a lot on innovation, but what we call collaborative innovation where we really work closely with our customers, understand their needs and then bring products timely to market. They're differentiated technology to support those needs. I think it's a great day today. We had our Analyst Day last year. We got a lot of positive feedback that came away from that, understanding the business better and really some deeper understanding of what JDSU does and how we're organized. This year we want to put some additional focus on the market drivers, so instead of just focusing down on the 3 businesses that make up JDSU, the 3 business units, I want to really talk about what are the strong market drivers out there and how are we addressing those with our innovation and our technology and our capabilities around the world. So with that, what I'd like to do first is really introduce the leadership team, at least those that are here in the room with us today. I think it really all stems from the leadership, driving the culture, the vision, the strategy through the organization, building strong teams of people globally that can carry through with that vision and make things happen. So I'm very proud to be part of this team and I want to introduce the folks here. And some will be presenting today. Two individuals that are in the back of the room, Andrew Pollack is our legal counsel, Andy. And Rex Jackson is in charge of businesses services, also in the back. The other individuals up here, Judy Kay is actually in Asia as we speak, one of her responsibilities is our Asian counsel and quite active in that. And Brett Hooper's back at headquarters, kind of holding the fort down. We need somebody to do that today. You will also meet David Heard, who's in charge of our contents business. Dave will be presenting today. Roy Bie, in charge of AOT products. He'll be presenting today. And Alan Lowe as well, in charge of CCOP. And then Dave Vellequette who many of you probably know quite well from interfacing over the number of years, our CFO. So again, very strong committed leadership team and a team I'm very proud of and really has implemented a lot of positive changes that haven't been easy changes, so a lot of work and effort but I think really have moved the needle for JDSU and our profitability and the business model over the last few years.

So with that, as I mentioned, I really want to today focus on our core businesses and this is how we look at JDSU when we talk about the core businesses. We have 2 of our businesses that focus on the network. One around the building blocks of the network, and that's Alan's team of people, the components and subsystems that go into that part of the high-speed network. And then the enablement, that's really the CommTest group under David Heard, again, is driving some new solutions out there to really help enable the networks. So we had an announcement this morning, hopefully most of you saw a new product coming out, PacketPortal. It's really a software platform and David's going to talk about that. We're quite excited about that and what that means for JDSU and our future. And I think it's typical, the types of products and solutions we're coming to market with.

And then the other major area is anti-counterfeiting. Roy Bie will talk to you about that. A very important part of the business, not as large as the other 2, but very profitable business for us, and it really does help offset some of the cyclicality we see out the networking part of our business.

So I think all you have to really do is look at this slide and it kind of paints the picture for how complex these networks are out there today. They're complex and are getting even more complex for our customer base network providers, the service providers. And there's more and more drivers being added to this on almost a daily basis. If you think of all the devices, smart devices, a number of devices that are hooked up to the network today. Dave is going to talk about some of the statistics, but some of what I've seen is by 2020 there'll be 50 billion to 500 billion devices hooked up to the network. Seem like outrageous numbers, but they're consistently put out there, and at the rate we're adding these devices and applications, it's starting to become really believable. So for the biggest part of our business around network, really strong drivers out there and we see those continuing for quite a long time.

So what we're doing today is really helping to make today's network more efficient. Well we're looking out for next generations of networks and we're calling that self aware network. So we built a lot of agility in, in the last few years into these networks, now we're going to try to go to the next step where there's even more intelligence in those networks. And again, that's part of what Alan and his team are doing around network agility and getting to these self aware networks. And then building more intelligence, and again, PacketPortal is a real good example of how we're working with our customers so they can get more intelligence out of their network, and now they can actually do that in areas of the network that they really couldn't even explore previously. They had a lot of blind spots that we're filling those in for them, and we're very excited about that opportunity.

Really strong market drivers around counterfeiting. We're on about 120 different currencies around the world. Again, Roy will go in quite a bit of detail here, but counterfeiting is becoming a bigger and bigger problem. There's a lot of statistics out there that will show you that type of growth in the counterfeiting. It's a real threat to economic stability around the world and we have some very unique solutions that we bring to market to really stay ahead of those counterfeiters and really reduce that threat to the economic situation.

And I think probably even more importantly is around pharmaceuticals. When you're counterfeiting banknotes, it's one thing, but counterfeiting pharmaceuticals is a whole lot different. We're really dealing with people's health and safety and welfare around the world. So again, we have some really strong, unique solutions in this area that really helps us to build market, but I think even maybe more importantly, is we're really doing something good out there for the people's health around the world, so we're very proud of that. And again, it's very nice strong growing area for us.

Together, those 2 major areas of our anti-counterfeiting business make up about a $4 billion TAM and growing. This is not all of the parts of Roy's business, but again, today what we'll focus on is those parts that we see the largest drivers for our growth and profitability into the future.

So we take all 3 of these major parts of our core together. We're looking at a TAM of about $23 billion and again, that's with some additional businesses in there that I didn't show on the previous slide, and a large and growing TAM of $10 billion. So large markets, great opportunities for us, unique solutions where I think we're addressing and really solving some difficult problems for our customers out there.

We're also playing in some adjacent markets. So the way we look at this is that we have a very strong technology capabilities inside of JDSU. We invest heavily into R&D and then we look at those investments and say how can we reuse some of that investment and really get more efficiency out of those dollars we're putting into new products and development. We tend to look at adjacent markets, new applications, new markets where we can actually sell this technology into. And I've got it listed here, just a few of those. Alan will go through some of these in detail, but I would say fiber laser's probably a good example. That's a business that right now is doubling quarter-to-quarter in revenue, it's reusing some of the technology that comes out of Alan's core business. It's a whole new market for us. It was a very significant TAM and growing, and so that's a good example of some of these adjacencies where we're reusing technology, cost efficient use of the dollars that we've already invested in R&D. In a lot of cases, this is breakout opportunity for JDSU. These are applications where we know they have lots of potential out there, sometimes it's difficult to really judge how fast these technologies are going to be adapted, but we know they will with time and that's a large TAM and a large opportunity for us.

Let me now jump over to really our strategy and execution. And the strategy we can look at in 5 key areas, the first area being that collaborative innovation. I talked a little bit about this already and you'll see it's the theme through each one of the presentations today. But it really is core to us because we think we're on a really good path here. It's helped us jump ahead of our competition in a number of areas. It's obviously improved our top line and our profitability. We tend to get better gross margins when we're out there early, and we really have a differentiated solution. So it makes for a much better situation as we improve our business model going forward. So we will continue to invest in these areas, listening to our customers, what do they need, what's the timeframe, what are the kind of price points and then really jumping out ahead and meeting those needs before our competitors can get out there. And each one of the presenters, they will have some very good, specific examples of that.

Mergers and acquisitions. We've done quite a few acquisitions over the years. Our primary focus is on organic growth, so really key. When we look internally, we set our strategies to primarily look at organic growth, so we do believe that acquisitions play an important role in areas like wireless. We could not have gotten into wireless with the timing of LTE coming on without an acquisition, so that's just one example so we will continue to look at the strategic opportunities where typically we can pick up the asset for cash, and it's accretive within a short period of time. Typically we'd try to get there within the first full quarter of operation with that acquisition.

Expanding our global presence locally. We have a really tremendous global footprint. Our true strength if you look back over the years has been North America and Western Europe, very strong footprint there, good market share. We're present in other parts of the world and we're doing business and it's growing, but we think we can grow even faster. And that's one of the ways we can accelerate our growth rate is by getting better infrastructure, better presence in some of these world regions. So you'll see a little bit later what we're doing to actually implement that. I talked about the leadership team, I talked a little bit about our employees and building that base, but employee commitment is absolutely critical to what we want to accomplish going forward, and we really do have committed employees. Everyday I'm impressed with things I see out of our employee base. I'll just use the Thailand flood as one example. When I look at what our employees did to pull together and really recover from a very desperate situation quickly and to really support our customer base, it was absolutely incredible. When you look at some of the photos, wading through chest-high water, bringing supplies out on rafts to get them out there to the customer, it's incredible. And I think you saw it show up in our numbers in the December quarter where we were able actually to recover much faster. I see it every day. It's a strong commitment. We do a lot to engage our employees, to listen to our employees. We have formal programs. Be transparent with our employees, have them engage with the strategy and where we're going so there's ownership and that level of commitment. And again, I think it stems down from the leadership team and how they interface with the employees and set the strategy.

And then the fifth is building a lean and scalable business. Now we continue to reshape our business over the last 3 years, I would say. We've gone through a lot of transition, a lot of downsizing, consolidation of sites. We took about 1 million square feet of footprint out in about an 18-month period, took a lot of costs out of the business. We will continue to do that. There's a lot of focus on process, better IT structure globally so we can become a more efficient team, fine-tuning our operations and honing it down. We will continue to invest heavily in R&D, that's not where we're going to see the cost savings. It's in other areas where we feel like we can continue to lean out the organization.

With that, let me just give you some examples of the execution around these key areas of our strategy. Collaborative innovation, you'll see some of the new products on the right-hand side of the screen here and we've got a lot more coming. We've got a full pipeline of these new, innovative, differentiated products, these are just a few. And again, you'll hear in more detail about these today. One of the gauges, one of the majors we look at in metrics is how much revenue do we have coming out of new products, and we typically look at products that have been introduced in the last 2 years. If you look at this chart, our initial goal is to get above the 50% line. If you look at that, we've run over the last 4 quarters above that and we've been in the 60s a number of those quarters. So we feel very good about the traction we're getting, and actually the pull for these products as we get them out to market because the demand there, and we worked with our customers and we've met or exceeded their needs in some cases.

M&A. This is typically around CommTest, the last 3 acquisitions over the last 3 years. Again, very strategic types of acquisitions, getting us in the cloud storage enterprise, seeing us into mobility and most recently the wireless subscriber emulations. And we'll continue to do these type of acquisitions where, again, they fill in areas of strategic need for the business and will help us to continue to grow. We're quite excited about where we're at with each one of these, and very excited about this most recent acquisition, Dyaptive.

On the adjacent markets side, last year we did an acquisition of a small solar company, QuantaSol, out of the U.K. Alan will talk a little bit about this, but added additional efficiency capabilities to our CPV cells, which we think is very critical to differentiating our cells out there in the market.

Again those acquisitions I've just shown you on these last 2 pages paid for in cash, accretive within a very short period of time and we actually replenished that cash out of our operational cash flow. That's the type of path we'd like to continue down.

Global presence, some pretty interesting statistics. Over 4,000 customers spread around the globe, and we don't have an over-dependency on any one customer and we truly do have a presence, a sales channel in all those world regions. So that's very helpful. We're in 150-plus countries that's built with our sales channel. So as we do some of these acquisitions, where typically they may be smaller companies that don't have that type of reach, very quickly we can get those new products for our portfolio pulled through that distribution channel and it can accelerate those sales pretty quickly. And then we put R&D sites in a number of places around the world where again we can be close to our key customers because we think it's really important to listen to our customers, develop what they need and really bring out products that really are specific to those world regions. A good example out of David's group, last quarter, MTS-5800, introduced specifically for the Asia market, tremendous sales. Some of the highest quarter sales we've seen out of any initial product in our history.

Lean and scalable. I talked about some of the things we're doing around that. You can see the payback both in this non-GAAP gross profit jump that we saw, and also cash flow from operations. The 2 very important elements for us is to keep driving up the profitability and keep generating cash so we can reinvest it back into the business wisely and keep improving shareholder value.

So let me summarize before I turn it over to Roy. Our investment thesis is really strong market drivers. If you look across those core markets, strong drivers and they're growing even stronger by the day, so we're very excited about that, both in the network and then on the anti-counterfeiting side of things. In those markets that we play in, we're very well positioned. You'll see we're typically #1, or we're very close #2 in those markets. So very good, strong position. Again, a really good portfolio of innovative, differentiated products. Again, we keep scaling the business and leaning it out. So as we see future growth, we don't expect to need to have a lot of expenses into the SG&A area. A little bit of variable selling expense, but beyond that, we think we can scale pretty much with what we have today for the market. So hopefully that gives you a general understanding of where we're at, what we're thinking about for JDSU. Now each one of the business leaders will go into some more detail in each one of these areas. First up is Roy Bie.

Roy Bie

Great. Thanks a lot, Tom. As Tom mentioned, unfortunately I'm not the 6'8" power forward. I'm more like Nate Robinson, the 5'3" point guard compared to these other 2 guys, but hopefully play an important role in the investment thesis for JDSU. So let me tell you a little bit about that. So on investment thesis, the way we'd like you to think of the anti-counterfeiting portion of our business is that we do have very strong market drivers, I'll show you some highlights on that. Counterfeiting is a profitable crime, that's why people do it. Obviously it creates a great deal of risk as Tom pointed out, and our job is to eliminate that risk. And we'll talk about how the counterfeiting has gotten easier to do over time, therefore opening up the opportunity for us. We have very good market position. We are a technology leader in this space. We have a long-term credibility. We've been doing this for over 20 years now and protecting currencies around the world. And as you might imagine, it's not a market that's easy to get into. And then as Tom pointed out, financially we're able to hold a pretty good financial model. Because of that differentiated technology, there are barriers to entry so it limits the competition and we do, as Tom pointed out, kind of buffer some of the cyclicality of the other 2 businesses relative to their profits, et cetera.

So what we do is JDSU is a trusted supplier of differentiated products. We'll talk about it as we go a little bit more into these anti-counterfeiting figures. There's never just one anti-counterfeiting feature on what you're protecting. It's usually a layered approach to make it even more difficult to counterfeit something. So the fact that we have a differentiated and broad portfolio is important in this market space and it is a growing market.

So the profile on AOT as TAM, again this is all of AOT not just on anti-counterfeiting. We'll drill down to that in a minute. It's about a $6 billion TAM just under $1 billion SAM. While the growth fluctuates a little bit depending on print cycles, it's roughly in the 6% to 10% growth rate. We did 231 last year, as you already know. And again, the profitability was just under 34%. And we have 775 employees, 100 miles north is the main headquarters up in Santa Rosa. We have folks in Robbinsville, New Jersey and 2 sites in China.

So again, how we derive the value of that model that you see down the left-hand side there is again the technology differentiation, our credibility with the customers, the security of the supply chain, our collaborative innovation and our ability to invest. I'll show you that at the end. Just investing for the capital in this business isn't sort of being [ph] hard, so we have to have credibility and know that the growth is going to come, and we'll talk a little bit more about that at the end. But we'll go through every one of those bullets as a highlight.

So let me just get you grounded. So why become a counterfeiter? It's 20x more profitable than being an illicit drug dealer. At the moment, there's very low penalties. There's higher penalties for copying a DVD and selling a counterfeit DVD than there is selling counterfeit drugs. With the heightened awareness around terrorism, just think about if terrorists were able to get into the pharmaceutical supply chain, what kind of havoc they could have on us from a fear factor, just the fear factor alone even if they weren't able to penetrate. So Tom talks about doing a common good, that's why the pharmaceutical side, we do believe JDSU is doing a common good. And as I mentioned a little bit earlier, it's getting a lot easier to do this.

In the old days, particularly around counterfeiting currency, you used to have to have very large pieces of equipment, you had to have the skill to be able to carve the plates that make the money plates. And so the Secret Service and the FBI probably knew the 25 guys that knew how to do that. And you were distributing these counterfeiting more locally, in your back alley you're making deals, et cetera, so it's somewhat localized. So usually there was a flaw in the carving of the plate and again, the Secret Service would know, "Hey, Joe did that because we know that's the flaw in his plate." Well now, with the advent of digital printing, almost anybody can become a counterfeiter. You could also make a website and be very anonymous. Drop your counterfeit goods inside of a FedEx box and ship it anywhere worldwide, so it's a much broader problem than it used to be. And if you don't think it's real, I was just in San Rafael 2 weeks ago, at a bar show up in San Rafael. And in my change, I got a counterfeit $10 bill. So my recourse is pretty slim. Not to offend anybody, but could be anybody in this room that made this. So it's no longer specialized where they go, "Hey, I know it's Joe with this plate." So any kid could've done this, some 18 year-old kid in Marin may have done it, who knows, but it's real. And for somebody that knows better, you might have to ask why do I still have it, right? So I have to embarrass myself a little bit. But as you can see, it's gotten a lot easier, so the protection needs have become much more acute.

Some of these impacts may be obvious, but you may think, who cares about some of this counterfeiting. Somebody may have flown in today to come to this presentation, just think about if aircraft parts were counterfeits. Make you a little bit nervous at 35,000 feet. From a branding standpoint, that's a real golf club and a counterfeit golf club, can you tell the difference, right? It's next to impossible to do that until you hit it. And I can't say you can use it for your slice while you have a slice, but you have a brake or something like that, you'll have a bad reputation in your mind around Callaway, "Hey, I bought this $400 driver and it didn't work, it broke," right? So there's a lot of brand loss or brand loyalty loss. Counterfeiters are very active with their syntaxes, so governments tax alcohol, cigarettes for example. Those are highly counterfeited because they can get into the distribution channel cheaper. But then government lose funding and you know what's happening with government funding around the world right at the moment. So it impacts government's ability to retake tax dollars back into their country. So there's broad, broad impacts of counterfeiting.

And the world's taking notice. I mentioned that -- you may have laughed a little at this, while, yes, go ahead and throw it in a FedEx box, but look at the headline on that article, and there was an article in Marine County very similar to this. High school kids, getting their IDs shipped to them from overseas. When I was in college, it was Joe in room 104 down in the dorm room. It wasn't somebody over in some foreign country shipping me my ID. Fake money, that's probably pretty obvious, you read about that on pretty much across the board eventually. And fake drugs, it couldn't be perfect timing for this conference today. There was a widespread articles about a couple of days about counterfeiting of drugs. And the one that makes this a little more elevated than previous ones, this isn't a lifestyle drug, this is a very important cancer drug, so it's usually administered in hospitals. So the fact that a counterfeit of this drug got into that hospital supply chain is certainly an awareness issue that hasn't been bought very loudly before. So again these are all drivers driving what's happening and why we're happy to be in this counterfeiting marketplace, because we believe there's high growth areas because of these drivers. Brand owners are starting to be more visible. In the old days, most people didn't want to talk about it because they didn't want to draw attention to it, they didn't want you worried about, "Hey, I will get a counterfeit Callaway golf club." They didn't want to draw attention to it. This is a page off of Kingston's website. Kingston makes memory devices for your computer and the little thumb drives. And they were having warranty counterfeit issues. They end up using our Phantom technology, and they now teach you by going to their website how to look at our Phantom technology and be able to verify if something's authentic or not. So much more overt communication to the consumer, to educate the consumer about counterfeiting issues and how to avoid getting stuck with a $10 bill after you go home on a Friday night.

Other market drivers. You can see the police and regulatory groups rising in the U.K. and double 34% higher activity in the U.S. Counterfeit ID, documents are involved in over 35% of the terrorist incidents around the world, and banknote demand is up. banknotes itself runs somewhere in the 4% to 5% CAGR rate, and it looks like it's going to continue in that rate by all accounts.

As I mentioned, the JDSU advantages are technology differentiation and technology breadth. As I mentioned, it takes a layered approach in order to create these anticounterfeiting solutions. JDSU is most known for its -- the top one there, it's over. And that means that it doesn't take any type of equipment to read it, your eyeball is the equipment that reads it, so the optically variable pigment that's on all of our currencies and our pockets right now, your eye is discriminating if that's a valid bill or not, for example. We do the same thing for brands and pharmaceuticals with overt technologies like Phantom. Phantom, if you can imagine that thing tilting the light right on the top will transfer, go dark, the bottom dark would go light again. So it's more of a contrast shift than a color shift. Then usually there is a covert feature. So we have what we call Charms, which is kind of a semi-covert. Adam has it set out on our booth out front, and that with a less than 100x microscope, you can see this little indicia there, notice how it says JDSU on it. So we can write with very small print to get that forensic ID in there, so we can make other people's logos, et cetera, to personalize that. So it gives the -- again, the law enforcement another layer to look at that you wouldn't know it was there because you can't see it with a normal eye. That's another discriminator for brand anti-counterfeiting.

And then, since we're in the business, we know a lot about how these layered solutions are. We offer up forensic capability also at the law enforcement. We have very close ties with most of the major law enforcement agencies. As I've mentioned, you can imagine you don't just knock on a central bank and sell your wares to a central bank. It's a pretty closed community, not very many suppliers in that channel. So you have to demonstrate credibility. You can imagine how upset a central bank would be if they wanted to print currency and your pigment wasn't there on time. So you have to be a highly trustworthy supplier into this channel. Plus it has to be a very secure channel. Just think about it. If you walked to a bank and the back door was open, you probably wouldn't deposit your money there. So the continuity in the supply chain is very important. We know how to participate in that channel. We have very close alignment with the specifiers and designers of the currency, and we collaborate globally. As Tom pointed out, we are a global company. That is an advantage that we have, because even with pharmaceutical companies now maybe based in the U.S., maybe based in Europe but they are also shipping worldwide, so you have to get into their distribution channels worldwide. So JDSU does have that capability of doing that.

First bullet on Tom's slide was about collaborative innovation. As he liked to say, it's more than words here. We actually live this collaborative innovation every day. So I wanted to show you an example. So we've been selling OVP pigment, optically variable pigments for many years now. We now have a product called OVMP, so optically variable magnetic pigment, and it's is our next-generation optically variable pigment, but it allows the designers to do new and exciting things to raise the bar for counterfeiting. So if you kind of look at the upper right. Imagine that's being tilted, so you see the color shifts, so it still has that same attribute that all of us have been trained on for the last 20 years, but now because it's magnetic with the equipment -- being involved with the equipment manufacturer, et cetera, we can make a 3D effect, for example. So that, if you saw it live has a 3D effect. You'll literally want to run your finger on it because it feels like it's raised when it's not. And I'll show you another sample in a second that we have out back. Same thing, color shift, but it has a silver bar on it and that bar moves up and down as you tilt it. So it gives your eye one more thing to look at to decide that it's not a counterfeited product. To do that with OVP, it was pretty much us and the first partner there, and the ink manufacturer. With their knowledge of the designers and the equipment manufacturer brought the product to market. In order to bring this to market, we had to be involved not only with the ink manufacturer, but also with the equipment manufacturer because it takes a special fixture in the press to do this. And we had to teach the government specifiers and the central banks how to design with this feature. So much more involved in the supply chain and it took that collaborative group in order to bring this product to market. So again, it raises the barrier because it's harder to counterfeit because you have to have all of these parts in order to make that feature come to life. So launched about a year or so ago in earnest, we have 14 currencies that are now using SPARK on a regular basis and growing.

This chart shows the currency in circulation. It's basically the M0 [ph] since 1971. I know one of the questions people ask and say in this new digital age, "Isn't that going to have an impact on banknote printing?" No doubt it has some impact, but you can see it hasn't dampened the growth in printing the banknotes and I believe Tom had a bullet that was record banknote printing last year. So not denying that it doesn't have an impact because obviously we do some transactions and we don't use cash. But in these emerging countries, they become very cash oriented, and that's a driver for us. Plus GDP tends to drive our activity so as they emerge and get their GDP up, there's more cash printed. And all of us use ATMs, you can imagine that the bill has to be not pristine but has to be pretty good. They run through the ATM machine on a regular basis, so that's shortens up the wear out a little bit.

Let me talk a little bit about what happens with currency so you can see that we're entering an exciting time. Usually when a country decides to do a redesign or initial design, they'll do trials and we'll see activity because we're either working with them on the color or working with the ink manufacturer on the color combinations, et cetera, in their designs. So we'll see a little bit of sales for that trials. Once the design has been decided and released, most countries will do a pre-inventory build before the launch. So they'll build up a year or more's worth of activity before they launch this new currency. And then they launch and then, as I like to say, we're in the warehouse business after that. It's kind of like being in the collision repair business. So as currencies wear out, they have to be reprinted. We see that activity come up. So obviously in years where there's a redesign of a major currency, those tend to be good years for us because you have a heightened output requirement for that pre-inventory build.

So if you look at some of the major currencies, these are the dates when those currencies were last redesigned. So we're talking about the RMB, the euro and U.S. in particularly, those are the 3 majors. Most currencies, in normal circumstances have been redesigned pretty regularly on a 7 to 10 year interval. So if you do the math, by looking down the left side, add 7 to 10, whatever your preference is, you can see we're either late or in that design cycle. So again, these common spurts because of these major design cycles, but we're obviously in the window where these designs will happen.

So we're investing in order to take care to handle the growth that you saw on the previous chart, plus the growth chart in banknotes. We're doing it in 2 ways. Color shifting is also being brought on to notes now through threads. So if you pick up your currency and you look, you'll see there's a thread in there. If you look at that specimen currency, see that, that's called a window thread because it's much more visible than ours that are hidden inside our U.S. currency. That'll be optically variable. So we're investing in the Santa Rosa, just to give you scale, that picture on the left, that rod that's coming out of the machine is about 5.5 to 6 feet long. Okay, so it's in a big piece of equipment. And that'll open up about $200 million more TAM to our optically variable products in the banknote marketplace. Additionally, we're investing in the OVMP pigment capacity. We elected to put it in Beijing where we had a facility that was sized in order to handle 2 machines. We've had 1 machine running there for the last 11 years. That machine's being built as we speak and will be up and running in the first quarter of our next fiscal year, so in early July. And that increases our capacity for making optically variable pigments by about 25%.

So as Tom said, we were driving down on the focus areas of the business where we have the most growth. Just want to highlight, we also look at adjacencies, as I talked about it, last year's investor conference we're able to take our precision optic expertise and take it down into other markets.

So our model is, is when revenues are in the $55 million per quarter range, our operating income will be in the $32 million to $35 million. We're pretty much running in that range. Our revenues have been slightly under the $55 million the last couple of quarters, so we've been in the low end of that operating range, but our model's solid enough that when we get the revenues above $55 million, we will be in that model. So again, takeaways from the attribute, as you might have imagined by all this, because of the importance of the channel, the capital investment for the equipment, there are high barriers to entry. Luckily we get into long contracts because you can imagine if the bills aren't being redesigned every 7 to 10 years, they want continuity of supply, they don't want to buy something that they think might go away later due to obsolescence or whatever, so we tend to get an annuity. But arguably, there is some quarter-to-quarter cyclicality. Quarter-to-quarter isn't really the cycle of our business. As you can see, our business is more yearly than quarterly. But we're always looking to strengthen the model by our technical innovation, continue and invest like you see in our core business and leveraging those adjacencies where precision optics are required.

So hopefully I was able to hit on all the items about why the AOT business is part of JDSU and is a solid contributor to the financial performance of the company. So with that, I thank you for your time and I will introduce Alan Lowe, President of our CCOP business.

Alan S. Lowe

Thanks, Roy. Unfortunately, I wasn't in the bar with Roy when he got the $10 bill. I've been at JDSU -- now in my fifth year, and I can tell you that I've never been as excited about the opportunities that we have in front of us because of what's going on in the network environment. The demands for bandwidth, whether it's 50 billion devices or 500 billion devices is unbelievable. And our customers are relying on us to provide them with the solutions they need to meet their customers' needs. And so when Tom talks about collaborative innovation, Roy talks about it and David talks about it, it's real. It really is real and it's what we're focused on, making sure we provide our customers with the products and services that they need when they need them.

So what I want to talk about is the network building blocks. In the investment thesis you can see, basically we provide products for our customers' need when they need them. We're a leader in a very large and growing market, and the dynamics of the industry are such that our customers are relying on us more. We use a unique capability and functional and vertical integration to drive the technology down to the chip level, and I'll talk a little bit more about that later. But what it really is all about is being a trusted supplier to our customers and our customers do trust us. Leveraging those core competencies and technologies to address adjacent markets that Tom talked about, I'll get into about 3 of those during the presentation, but it's all about leading in technology and being the leader, and I'll talk about that as well. So before I get into the details I want to just show a brief video from one of our key customers and what he thinks about JDSU.

[Presentation]

So that's Tom Fallon, CEO of Infinera and a customer of ours that we work very closely with. And I love when he talks about bringing massive capacity to the network. So it's great. And that's what we do, we really are in the business of bringing capacity to the market and the networks are changing, as I said before, to being rapidly growing, of course, but unpredictable. And that provides opportunities for us to really shine. And I'm going to talk about that and how we're addressing that and the dynamic unpredictability nature of the network.

But first, we're in a big market, $8 billion. We address about $5 billion of it. The long-term growth rate is in the low teens. And it's not below teens every year, but I think our goal is to make sure that we are there as the market grows, and grow at least as fast if not faster than the market. Fiscal '11 revenues of $771 million and within our operating model of 16.9% operating margin, 1,300 employees. So what do we do? We provide optical components, both to the telecom business, telecom service providers, as well as to the enterprise communication Datacom, LAN/SAN, fiber channels, those kind of products. And then we provide lasers to customers that use them in various fashions, whether it be material processing, and I'll talk about that as we address that market with the fiber lasers, or medical or other types of applications. And then we address the photovoltaics that Tom talked about through our efforts in CPV.

So when I talk about unpredictable, what that means is that the networks have to be dynamically changeable, and Tom used the term self-aware. So today, it's very expensive to switch. If you look at this diagram at the top where you're switching from optical to electrical and back to optical several times, it's very expensive to do that, very power-hungry and the networks are less dynamic. So what we're focused on with our customers is moving down the levels of the network to be able to switch dynamically at the photonic level. So really basically staying in the photonic level or switching the light where the network needs the bandwidth, when it needs it. And so we're able to do that through what we call self-aware network, and we drive routing to the network where it's needed most. At the same time, we need to have bigger pipes, and so our efforts are really around going from 10 gig to 40 gig and 100 gig, and rolling those out today to provide the networks the kind of bandwidth they need, but also have that functional switchability, if you will, to drive dynamic reprovisioning of the network. And what does that all mean for our customers and their customers? It really means lower costs in cell networks and lower costs to operate them. And together with what David does in the CommTest area, it's quite a unique solution that JDSU brings to market.

So how do we make sure that we have the leadership to provide our customers the products they need that are differentiated from our competitors? It's really based on 3 core wafer fabs that we have here in North America that provide products based on different material substrates from indium phosphide, lithium niobate, silicon and gallium arsenide. And what I said earlier about driving functionality down into the chip level to provide the lowest cost solutions, lowest power consumption, smallest footprints for our customers that, for example, you look at the first picture on the left, the little tiny chip that's on the fingertip, that's the core chip that goes into our tunable XFP. And before we invented that chip, the components to the right of it all went into a big box and that provided that same functionality as what we have on that chip. So driving functionality at the wafer level is critical. We take those chips and wafers and stick them into the components, put those components into modules, and also those modules onto what we call the Super Transport Blade, provide those solutions to our customers at whatever level they want throughout that chain. And then our customers then put them into their chassis to provide network capability to their customers. And so what we're trying to do is provide the lowest footprint, lowest power to make sure that we are leading and providing our customers with the differentiated solution to the network providers.

What is the result of that? Well, it's leadership and differentiated leadership. We shipped over $120 million worth of tunable XFPs. We have over a 2-year lead on our closest competitor. I think our closest competitor in their last earnings call said they sold a couple of million dollars worth of tunable XFPs. Well that's pretty good, but we've done $120 million. Super Transport Blade, we invented the Super Transport Blade concept. When a customer came to us and said, "Hey, we've got these 4 blades, one has a ROADM, one has an amplifier, one has a bunch of other stuff and a channel monitor. How can we, together, figure out how to put that on one blade." We developed Super Transport Blade with several customers today and have shipped over $120 million worth of that product. And then ROADMs. ROADMs are growing probably the fastest part of our business and the fastest part of the network, and we have over 50% market share as reported by Ovum and Infonetics recently. So you might ask, well what have you done for me lately? And so what we've done lately is continue to try to drive for further differentiation with things like what I'm showing here, tunable SFP+. We've shipped to several customers, we're in design and qualification cycles on tunable SFP+s and really what that is, is the next generation of 10-gig optical transducers. So lower power consumption, smaller footprint, more density, customers today can put probably twice as many tunable SFP+s on a board than they can put tunable XFP+s. That's a big deal when you're talking about footprint in a chassis for the service providers. First in the industry. Another first in the industry, and we'll be in production in the next few months.

We're also working on, as I talked about, bigger pipes, both on the client side and on the line side of the business. So again, using our functional integration at the chip level. We believe that we'll have the lowest power consumption, smallest footprint and lowest cost solution for our customers, both on the line side and on the client side. We are sampling customers today on many of these products and expect to be in production later this year. And in fact in some cases, we are in production today.

So now I want to shift gears and talk about some of the fallacies about today's network versus the future networks. Some of our competitors talk about their product being future proof, and so I want to just clear up a few things about that. So the reality about today's networks, which are really 10-gig, 40-gig and 100-gig networks really are around how do we get the biggest pipe out there at the lowest cost and how do we provide switching solutions at the lowest cost. 100 gig is just now hitting the market over the last year, and it's going to be here for many, many years to come. The key attributes that our customers are saying is cost. Not just on the line side but on the access and metro side because ROADMs are becoming more and more important and they have to have the cost model to be able to look forward [ph] in many of these at the edge of the network. Small footprint, performance requirements that provide, to be able to deal with speeds up to 100 gig and a cost optimized for either 50 gigahertz or 100 gigahertz. Because networks don't change between a 50 gigahertz network and a 100 gigahertz network. They put them in, it's either a 50 gigahertz or it's 100 gigahertz and it's not going to change. And so what we've done is develop MEMS-based ROADMs that address all of the functionalities that the customers need for either 50 gigahertz or 100 gigahertz today, to address the network needs of up to 100 gig transmission speeds. So you can read the quote here at the bottom that basically says that today's flexible ROADMs aren't as good as ours, and I think that's obvious when you look at the market share that JDSU has compared to our competitors, over 50%. So when we're talking about future proofing or we're talking about the next generation networks beyond 100 gig, here's what our customers and our customers' customers are saying. Yes, they need flexible grid spacing because it's not clear what grid spacing is going to be needed for 200 gig or 400 gig or whatever comes after that. But they also need a lot more than that. They also need to have better performance, better performance optically when you come to put in 200 gig or 400 dig ROADM. That's not going to be the same kind of dynamics that's going on in today's 10-, 40- or 100-gig ROADM. They need higher port counts, our 1x9 and our competitor's 1x9s aren't going to cut it in the core of the network. They need much higher port counts. They need coalesced direction with some contention with capability. They also need to be able to have self-aware networks, and we'll talk a little bit more about that. And they need to have both add and drop functionality. They need that today, but they can address that by putting 2 ROADMs in each of the nodes. But they're saying, "Hey, I want a smaller footprint. I need 2 ROADMs, what can you do for me?" And then they need all of this other suite of product portfolio that come along with it. You need a different kind of amplification, you need a optical channel monitor that's flexible and you need multi-cast switching. All with cost in mind and all with the fact that you need to have power consumption that meets their needs, as well as size that meets their needs as well. So JDSU has been working over the last couple of years on a TrueFlex product. It's very, very different than today's [ph] cost based product, because it had in mind all of these requirements that the future networks are going to need.

So here's our product portfolio of TrueFlex products. The twin TrueFlex is a twin product, basically has 2 1x20 ROADMs in it. Truly flexible on grid spacing. We sampled many customers already. The feedback has been outstanding. And then we have the various other products that need to go along with it for EDGE, ROADMs or for multi-cast switching and for optical channel monitoring. To be able to work in concert with the twin or the other types of TrueFlex products, to be able to provide our customers with the dynamic needs they have to have, to support 200 and 400 and the terabit type network. So all of our TrueFlex products were designed with those types of requirement in mind. And we believe that it really are the answer for the future proofing of the network as they roll out today, and they're the core to the next generation of Super Transport Blades and we're already deeply engaged with customers on the next generation of TrueFlex Super Transport Blades.

Here's what NSN says about our TrueFlex product. They were one of the first customers that got it. You can read all the stuff about what they had to say, but the bottom line is they believe that the twin TrueFlex WSS, provides all of the advantages and features we need in single compact form factor. There's no other person in the industry that has what we have. And we're very proud of it, very excited about it and our customers are telling us that, too.

So I just wanted to do a comparison because our friends do a comparison of us. But we have more check marks than them this time. This is just a rehash of what I said earlier. You need a product portfolio to provide customers what they need. You need to have true flexibility. You need to have the requirements of the future networks in mind when you develop the products. And you have to have the capability of testing it. And so JDSU is in the unique position with what David Heard and his team have to be able to provide the products and technology and testing and enablement that nobody else has.

Okay. Now let me shift gears for a second and talk about the adjacent markets. As Tom talked about, now we have a big investment in R&D. And being able to capitalize on that R&D dollar and address adjacent markets and growing our top line through these adjacencies is critical, and has been a focus of ours for the past several years. The first is the fiber laser market. And you can see, it's a big market, growing very fast, over $1 billion by 2015, nice CAGR and something that -- in 2008 we started a partnership with a company called Amada. Amada is the largest sheet metal processing tool supplier in Japan, and one that we are very, very closely aligned with. I mean, it is just the epitome of collaborative innovation, what we've done with them and what they've done with us. So I'll just take a break and let Okamoto-san, the CEO of Amada, tell us about the collaborative innovation that we've done with them.

Unknown Executive

[Japanese]

Alan S. Lowe

So Okamoto-san really did say what the subtitle said, in case you're wondering. But as a result, and you can see in the video and also in the picture here, we've collaborated with Amada to develop fiber laser that goes in to their sheet metal cutting machine that they think they're going to able to beat anybody in the market. They won a very prestigious award called the Masuto Award which only 2 companies in Japan won this past year for innovation, and JDSU enabled that innovation with Amada. And so we're quite proud and quite happy with the success of our first fiber laser. We shipped almost $5 million worth of fiber lasers last quarter. And that was doubled from the quarter before, and we're growing quite substantially this quarter. And in fact, a great thing from the joint collaboration we have with Amada.

We also kicked off about 1.5 years ago the second generation fiber laser, and you can see the benefits there: Cost reduction, size, footprint reduction and power consumption reduction. It's all about how do we drive the capability for Amada and their customers to drive cost down, drive footprint down and we believe that together, based again on our core technology that we had from telecom, basically our pumps drive this laser and collaborate with them to have them win in the market, and we're very excited about that.

The second adjacency is what we've done in gesture recognition. Again, based on higher reliability, pump technology, we've been in production for the last 1.5 years or so with gesture recognition products. Both using Roy's AOT filters and our laser diodes to address gaming. And you saw in the opening video lots of people moving around and controlling the game. But I think that's just the first step. You can see gesture recognition is now included in Microsoft Windows 8, and Verizon made a press release that they even get FiOS on Xbox and control that with gesture recognition as well as voice. So it's just the beginning, I think, and really, we have very, very high hopes for applications outside of gaming as well as inside gaming.

You may have seen this before but basically today, we provide 2 key components: the laser diodes and the optical filter. But today, we're working on the next generation of gesture recognition with several customers. To figure out how do we provide more functionality that allows additional applications, broader range of applications that -- and also drives cost and size, it's all about driving cost and size and providing more functionality. So we don't have anything to announce today, but we're very excited about enabling new applications whether that'd be somewhere in the family room or elsewhere on the computer to have gesture recognition. And then, finally, the third adjacency is what we're doing in CPV. You can see, this is our CPV sales guys, standing next to our customer in China, in Western China where we've installed a megawatt of CPV solar cells and it's massive. Just 1 megawatt is massive. It's really quite exciting to see. And as Tom talked about in July, we did an acquisition of a small technology company that provides what we call multiple quantum well technology to CPV that allow that technology to have even higher cell efficiency. So today, we have good cell efficiency but together with QuantaSol, we demonstrated even higher cell efficiency and increasing the efficiency of the CPV cell will enable it to be even more competitive against other types of power generation, whether it be solar or other, be able to make it more of a bigger part of energy generation. So we're very excited about that as well. And this is really not something you're going to see on your rooftop. This is really for the multi-megawatt type applications for really utility scale installations.

So let me shift gears and talk a little bit about the business model. You can see that in fiscal year '10 to '11, we have -- as Tom talked about a lot of restructuring, a lot of leaning out of some of our processes and a lot of driving for more possible and innovative products. We grew the business pretty dynamically, and in fact, during that period of time, we changed our business model to have operating income between 16% and 20%. So today, with some of the lower revenues we had from the flood and some of the pricing issues, not issues, but some of the seasonal pricing challenges that we had, we're not in that model, but we will be back in that model. Let me just change gears just for a second and talk about pricing. There's a misconception that it was an abnormal pricing environment. And I would say that 2010 to 2011 was an abnormal one. It was abnormally low. But typically, as we said in our earnings call, we had 6% ASP reduction between the December quarter and what we expect the March quarter to be. But we expect the overall annual price reduction to be about normal in the 12% to 13%. So I don't think it's anything different than we normally seen, but we're counteracting pricing with new products. And our drive for giving our customers more value through innovation and driving higher value-added products for our customers will improve our gross margins and get us back into the model. You can see the timing of those new products 1,400 gig is going out today, tunable SFP+ this summer and then TrueFlex by the first half of fiscal '13.

As we ramp up fiber laser, we were not able to get our gross margins where they needed to be because of the Thailand flooding, so we didn't localize our supply chain in Thailand during the flood quarter of last quarter. But we have revamped that and we'll have our fiber laser margins back in line by the first quarter of fiscal '13. And then you can see these other opportunities we have with regard to supply chain optimization, multi-sourcing and then driving some redesign efforts where we need to really truly have a step function change in the cost structure of our product. And then we're going to grow our top line through the adjacencies that I talked about, but also what Infonetics is calling the optical reboot. And basically, they say that Optical networks starting in calendar 2013 through 2020 are going to go through a major, major greenfield expansion because of what I talked about earlier and the dynamic unpredictability of network demand. And so we believe that really provides us further opportunity to grow our top line such that by the end of the calendar year, in the second fiscal quarter, assuming that we have revenues of $210 million or more, we'll be in the gross margin of 33% to 36%. And at the same time, we're spending more in R&D. We're not cutting back in R&D. So we need a little bit higher revenue to achieve those operating margins of 16% to 20%.

So as I started the presentation talking about how optimistic I am about the business, I'll finish by saying that I'm very optimistic about the business, very confident in our ability to get back into the operating margin models that we've talked about and very excited about our opportunities to collaborate with our customers. So with that, I'll return to the investment thesis and hopefully I've spent the last 30 minutes with you -- convincing you that our focus has been collaborating with our customers, differentiated products, developing customers -- developing products our customers need, when they need them and providing technology leadership through that process. So with that, I will close and say thank you, and we will go to a break for about 20 minutes, right? So thank you very much.

[Break]

Michelle Levine Schwartz

If everyone is complete, take your seats. We're going to get started shortly. Right now, I'd now like to introduce our next speaker, David Heard, who is President of our Communications Test and Measurement Business.

David W. Heard

Thanks, Michelle. I think everybody's open about collaborative innovation. I think one of the really exciting things about being at JDSU is as Alan discussed about getting in early with customers and collaborating with customers early on in the design cycle. It's equally fun to collaborate with Alan's team and get in early with customers at the pure physics level of what it's going to take to make this network change happen. And we're seeing that happen more and more, because to break boundaries, to break boundary conditions, to break upper and lower control limits, it takes that kind of early thinking in the process and we are the only company that's positioned to have that early insight to true physics of what's going on with our customers.

And in optical networks, just to kind of give you a relevant example, we had a major customer here in North America that they were really worried about laying out this 100 gig systems out in the field. Why? When you lay out a big 100 gig pipe, think of how many customers you're serving? You're not going to pull that big 100 gig pipe out of service and say, "Sorry, we've got to go through some testing." And so Alan's team and my team and the customer really sat down and we actually architected early on before even 100 gig was in the lab. A system to be able to test 100 gig field systems while they're actually carrying traffic. And that delivers real value to our customers and that's something that our competitors can't touch. And that's why the value of Tom's collaborative innovation, it's just so important, it's such a pillar of what JDSU has raid at for our customers and, obviously, for our shareholders.

So I'm going to talk to you a bit today about the contest investment team. It's about big growing markets. There's no doubt that the market's R&D growing. About the importance today and more important than it's ever been about having end-to-end solution, not about selling a box or an instrument, it's really about end-to-end solutions for our customers. We'll translate that into strong value propositions for our customers. Our customers don't want to see PowerPoint anymore, they want to see Excel. So they want to see true value proposition that translate into ways to make them competitive. So it's not just collaborative innovation, but it's collaborative innovation with business purpose that you can demonstrate in real numbers. We'll talk about some disruptive technologies that we've been working on for a number of years that we've seen based on the pace of the network and about an attractive business model. And not only an attractive and improving business model, but a clear path with clear deliverables and clear confidence to get to a target.

Okay? So just to kind of simplify things, to try to really make things tangible for us all, when you think about what communications test does, our periodic table of elements, to make sure we enable the network, is really in these 4 elements. We make the world's best instruments that are on the tool belt of installers, folks that deploy, folks that optimize networks. And that's not going away. The number of pipes having to connect us all and connect these devices are growing. We make the probes that we leave in the network to be able to listen to the heartbeat of the network, because there aren't enough technicians to be able to constantly monitor this dynamic network. We bridge the software and build the software, and this is becoming a lot more important to transfer the intelligence from those instruments and probes, to turn data into information for our customers, to allow them to manage an unmanageable situation with the way the network is growing. And this is part of our business that is becoming more apparent from our customers, the need for network intelligence. You saw Tom mention it, from agile networks on the building blocks, to network intelligence on how CommTest is to enable the network. And then lastly, we do have a assurance solutions so that our customers can set the boundary conditions for the service level that they provide you us an end user. These are the 4 building blocks of what we do, and it's never been so important that we tie them together and look at customer solutions around them.

So just a quick snapshot of the business, a very, very large TAM, $9 billion TAM. Our goal is to continue to attack more of that TAM from our SAM coverage. So our addressable market coverage is $3.8 billion. I'm going to talk to you about some really unique investments that we've made to be able to continue to grow that SAM to TAM coverage. While the overall market growth of 6 to 8 percentage points for test and measurements looking out is a healthy growth rate. What we're really finding is the unique problems in the network around video, mobility, cloud computing, hard growing at rate, some of them, some of these unique problem statements, the market for those are growing at double-digit percentages. And so our job has been over the last year since we talked last time is investing in those problem areas where solving customer problems and those happen to be growing at a much greater rate than the 6% to 8% average. In fact, if you look at some of the decelerating technologies, our legacy technologies, they're shrinking at 6%, while the new technologies on average are growing at about 17%.

Overall, about an $814-million business. Our operating margins in FY '11 were 14.7%, that was 2.2% better than the prior year. And I'm going to give you a pretty big deep dive into what we did to get that improvement, and why we're confident that we put the fundamental foundations in place over the last 12 months to be able to get to our target model of 20% to 23% by Q2 of '13 for us. And I'm going to talk to you about our building blocks to get there. Overall, 2,400 employees. What are our kind of assets? When I think about what our strategic assets as a company, we have #1 market position in network communications, test and measurement. That gives us a seat at the table. The good news is we have a seat at the table with 4,000 voices around the world, 4,000 different network environment. Communication test comm, Tom went through the acquisitions that we've been making. In some of those higher growth areas, if he went back to the true history of CommTest, it would show about an 87-year history. And it's important that we have that leadership position, we have a seat at the table and we have a history of how these networks evolve, and it's why our customers are relying on us as a trusted partner.

We build platform. So a lot of people ask, well, what happens when the alphabet soup of DSL technologies cycle through what you do? We build platform so that the field technician or the folks in the network operating center don't have to relearn technology, don't have to relearn an interface. Our platform for 10 gig, optical handles 40 gig and 100 gig. Makes it really easy to be the competitor when the field technician already has JDSU equipment out there. Our equipment for DSL, as ADSL moves to VDSL, same platform, different module for us. So it allows us to very effectively supply our customers with easy-to-use technology, and for us, with a profitable model to be able to have that platform to make it easy to sell and sell nice upgrade onto the technology. These are some of our major platforms that we sell today.

So where we play in those 4 fundamental building blocks? Where we play, where we focus, when we -- where we listen to our customers, we are clearly #1 or #2. From things like Ethernet, where we own 48% share of the marketplace, a clear #1 position. A clear trusted partnership position as mobile operators look to build out mobile networks that require to be connected cost effectively. Ethernet is a huge play in that domain. You see in probes system software we're introducing some of the one and only category for our customers. So again, where we play are clear #1 or #2.

So what drives CommTest business? It really is 3 fundamental factors that play into a difficult problem for our customers in change management. Meaning, the traffic on the network is growing. Cloud applications growing 12x over the next 3 years. We all know mobile is taking over the planet. There'll be more mobile devices, mobile phones than people in the coming years. 60% of that traffic on the mobile networks by 2016 will be video. So there's no doubt content is king as you heard Tom say 90% of the consumer traffic will be video. It didn't exist a couple of years ago. It's very hard for our customers to digest. And the broadband network, just as Alan went through, just continued to need to grow, to accommodate all that. When you look at that traffic growing, devices are growing at an unprecedented pace, and it's not just devices that you hold in your hands or on your lap or on your desk. But it's smart meters. It's your car. Your car is a network. A car has 20 million lines of code today; predicted to go to 100 million lines of code. Network in the car via Ethernet. Getting all these devices to talk to gather in intelligent vehicle systems to smart grid technologies, this is what the mobile service provider and the service providers are faced with the challenge today. You think about that multiple devices for human being, you can't put enough field technicians out in the marketplace to be able to handle that. So there's got to be a way to solve that problem for our customer. And that's why we sit at the table with our customer to think of things before they need them. And to have them ready, as Alan said, when the problem exists and before the problem exists.

Applications. This list of applications or if you look on your kid's iPad or desktop, it just didn't exist 4 years ago. When I started in telecom, when voice traffic was $7 a minute for a long distance call. When we launched the first cellular systems of analog, the analyst told us that the subscribers would cap out at 3 million in the U.S. because of the expense of mobile phones and the service. These applications weren't here 3 years ago. Dealing with carriers on a global basis to have traffic, devices and applications explode, it's no longer building field of dreams, we're building to catch up. And what the carriers want to do is get ahead, and the NEMs want to do is get ahead.

Now we as engineers, sometimes the geeks of the industry, how do we deal with those 3 things? It's all about protocol. And how do they intermingle and interact? We have an 87-year history of that. But it's really about change management. How do we help our customers accommodate for this pace of change. And that's really what it's driving an increased need in the marketplace for test and measurement. When we think about those building blocks that I talked about, we think about them no longer for a particular workgroup, somebody that climbs up a pole or climbs into a central office. We're thinking about them. Our customers are bringing the situation thing. "I've got to deploy an LTE network fast. I've got to deploy DOCSIS 3 quickly. I'm trying to compete as an IPTV player. Tell me, how do I build provision optimize my network?" And so we look across these segments at solutions where having an end-to-end solution is extremely important. I mentioned that the early collaboration as Alan's team is working on the physics with their customers, having a seat at that table is one that nobody else in the industry has. When we look at our competitors, we are really the only players that have products and services in each element of these segments, across instruments in the lab, early on as people are designing products to go to field, in the field where we're clearly the #1 player in instruments that are equipping the technicians to build, deploy and optimize networks, probes, to be able to listen to the heartbeat of the network, software to tie it all together and service assurance. We are the only player.

Others, whether it's an Expo or a Sunrise, have chosen the slim way. They provide field instruments so our lab in production or aspirants that may provide service assurance along with performance analysis year. What we're learning about is that network problems have never been more complex and if you can't communicate across the network, it's a lot harder to solve the solution. You might solve a point solution, but are you really solving the problem? And I'll talk about a couple of case examples that really brings this to bear. These markets are growing very fast, a lot of people ask me, "Tell me about your investment pieces or your investment position in these?" For us, today, cloud is a little bit less than probably 10% of our revenues as we look at it. Mobility or mobility purpose built here as well as the Ethernet backhaul and all the other pieces of the broadband infrastructure that ride across mobility, roughly about 40% of our overall business. Video, media access and content, it's about 20%, and broadband, just about the remaining 30%. But carries, again, all that traffic of everything above it, which is why we're uniquely positioned with our customers to bring real solutions.

So I lifted this from one of our customers Analyst Day, from one of our customers Analyst Day. These are their problems, very, very clear that they just reinforced everything we just went through. And so providing them with a solution that makes the complex very simple, reduce operating costs, win and retain customers and enable new revenues. It's essential and the only way you can do that is with the end-to-end solution. Big element on here, just to put something in, I've been in this industry quite some time and the word churn has never meant so much as it does today. Remember I talked about PowerPoint moving to Excel? Our customers, when they talk about, churn now, are putting real numbers to churn. The largest mobile networks in the world, when they talk about 0.1 to 0.2 of a point of churn to them, that's $100 million. And so if you can help them and tell them how you could solve the problem before it hits their customer, we've never been more open at their table. So again, strong value propositions. I'll give a couple of examples of how all of those building blocks, all of those fundamental elements on our periodic table are playing a different role for our customers.

So in this case, in a broadband network, I think you've all been at this position before. You're out in your business environment, you're at your office and the Internet is slow, right? You call your service provider and say, "Hey, look, I have 100 megabit pipe coming in here. Please tell me why my Internet is slow?" Using traditional tools, they would come in and check the pipe. And they'd say, "Well, you have a 100-megabit pipe. I mean, everything appears to be okay here." Which makes steam come out of your ears and you pound the table and you churn at the service provider. So by collaborating with 3 of our largest customers, we said we got to fix this. And we want to fix it without having to retrain technicians. So that same device, the T-BERD family, device that's out there in field technician's hands, we can, today, download software application called TrueSpeed. And what TrueSpeed does, is it pinpoints on that pipe, layer for or what's going across the pipe. So immediately, tell the service operator, "Oh, I see, we have 100-megabit pipe, you're only getting 20 meg through." Here's where the problem is and allows them to pinpoint the fit. For our customer, it's an industry first, we created a standard for it to help our customers. But it pinpoints the quick problem, creates again less churn for us and for our investors, we have 30,000 of those existing devices out there to download software onto them, it's a nice margins for us, really, really helps our business model.

So it helps the customer, helps our business model, it's a very large opportunity for us. If this kind of innovation that's running across CommTest as we listen to our customers, we've got it already on the first meaning available for the first 30,000 units. We just introduced this quarter that we announced. And we're already looking at putting it onto the remaining platforms that we have. Driving real value. And again, these are significant numbers on a per unit basis. They drive real profit to us. We won some awards for it. The more important thing is, it's really going to drive real customer satisfaction for us and real bottom line for our business model.

I'll give you another similar situation. You've all been a media cable customer where you want to have DOCSIS 3 installed. Our installer can actually come up with our industry-leading instrument, the DSAM, that's in 92,500 technician's hands. We show up and very quickly can provision your network. A problem that used to exist within your home is if you had a home networking problem, it was dark to the service provider, to the Time Warner, to the Comcast, whoever is serving you. They couldn't solve for that. There is no clear way to test to that. So we are able to do was innovate with our customers once again and create SmartID. SmartID is this network plug here that goes into every one of the sockets in your home, interacts with the same DSAM and certifies and tests the home wiring in under 3 minutes. It's an add-on to the existing DSAM. It's a major customer satisfier for the [indiscernible] customer for our customer, and it's the combination of these 2 things together are accretive to our business models.

When that technician leaves your home, he now leaves a system in place or a probe in place called PathTrak, MACTrak. That system, once he's left your home, is going to monitor your DOCSIS 3 network, and tell when there is a problem and pinpoint it to the IP address or the household. So no more driving around hubs and for the service provider. Providing them the ability for their installers to install fast, to pinpoint the problem, to offer much higher quality of experience and eliminate truck rolls. And then, we can leave the assurance platform in place which allows the carrier to offer service levels to their customers. See, that's an end-to-end solution. The good news about this DOCSIS 3.0 I'm talking about, which is a pretty big trend, the DOCSIS 3 environment is less than 10% penetrated for us. It was a healthy grower if you look at our last quarter of earnings. This was a healthy grower in the first half of the year for us.

The great news is we not only have this for the cable environment, the IPTV market is a much bigger market than the cable market. We have the same kind of product line up for that, the same kind of product line up. That market is even less penetrated in terms of the opportunity than the DOCSIS 3.0 market. Again, when you put these products together, they are, from a margin perspective, accretive to the business model. So these are real solutions that solve real problems for our customer, winning awards, but more importantly, are going to contribute significantly to our business going forward.

In the wireless domain. When I started in wireless, it was more about RF. How many bars are over your head? Now, it's not about just how many bars are over your head. With the applications and with the bandwidth, with the amount of video that's going across the mobile networks today, it's about the interplay of the base station with the rest of the network. Who better positioned to do that than the leaders knowing each element of that network. Base station test, these are not backhaul business we talked about as having market leadership. We lead in the metro transport, in the video space, and then in the network probing space. And we're going to be talking about some technology that even accentuate this more in terms of our product announcement that we made today. Tom mentioned that the Agilent NSD acquisition really helped us field a more significant presence here. And our customers have never been looking for a more solution-based approach versus buying individual elements. They're trying to roll these networks out as fast as they can.

The Dyaptive acquisition in this case was all about we found a company that actually tested the network elements on a network. And, Tom, I think everybody has talked about, is it 50 billion or 500 billion devices. We need to know how those devices and applications scale. We found an outstanding company with outstanding technology that didn't have much of a channel nor the whole solution. So we brought them on, and we've seen great accolades from our customers in terms of that being the primary driver in what they need going forward. And good for us, that product again has growth and it's above our current business model. So these are all things that we're doing to strengthen our customer value proposition and our investor promise. Okay?

So now the game changer. So as you think about so many devices out there and you think about a cloud-based, application-based mobile always-on world, how can you get to all these devices? How can you guarantee -- in my home before Christmas, I had 24 network devices. After Christmas, 27. Think about how many devices are near you and pinpointing those problems, it's a huge challenge for the service operator. And when you think about traditional network probing, you did that in the core metro of the network. Because you couldn't afford to take these big heavy probes and stick them near your home or take those and stick them near a cell site. Many of the new cell sites coming out on the market are less sized than these big, heavy monolithic probes. So we've been thinking about this for a number of years and saying, when a network is on fire and applications are on fire, how do you fight fire with fire?

So what we said we have to do is create a new paradigm. And PacketPortal, which is what we announced today, is a cloud-based smart network application platform that allows service providers to get this kind of probing technology down to this kind of size. And how do we do that? We enable it through network software, kind of the iTunes of the network that can sniff out all the network elements that are out there and get our service providers visibility into the nooks and crannies of the network and to the edges of the network that they couldn't afford to go to before. Really groundbreaking and open application platform. Let's take a look at the video. What I'm going to tell you here is, this is a revolutionary and the only way to handle the explosive network growth out there. It is very much modeled on an open application platform. It was designed with over 30 of our customers. It has been our largest R&D investment. All right, so this is something we've been investing in for a number of years, has a very, very strong patent portfolio and very strong customer reaction so far. So let's listen to the video and try to give you a little bit more of a look and feel for what it's doing out in the network for our customers.

[Presentation]

So hopefully you've got a little bit of a feel for how revolutionary this really is for network operators. This is a new cloud-based approach to really bring true visibility back to the operators to help them solve problems before they cause problems to their customer, to see the network the way their customer see the network. It gives you this intelligence across the network and does it in an open application platform. So our customers don't have to change what they do in terms of the screens that they interface to. And this is the only way that we're going to get to the edge of the network and manage it to some precedented demand.

So what does it mean for our customers and thus for our shareholders? So from a customer perspective, it's pretty clear. Our customers are able to have fast payback in terms of deploying a technology that fixes problems faster than they could ever fix, and honestly, 80% of the problems again are at the edge of the network where they have no visibility and have never had it. And that's where it cost the most money. It's a long curve the closer you get to the edge of the network. For the business case as we've seen from our customers, our months, not years, so it's 12 months, 9 months, 6 months, we're able to reduce operating expense, reduced trouble fix -- troubled fixing times and actually, provide some healing before problems really occur. So because PacketPortal is programmable for our customers, when they see a problem, if they have the signatures or characters to that problem, and they collect them, they can actually log it, create an application and say anytime I see that again, network go do X. We've heard about self-healing networks for -- ever since I've been in the industry.

Alan talked about agile networks, self-aware networks and now we're talking about self-optimizing networks. And that's what PacketPortal is all about. Fast payback and really provide them the only cloud-based solution in a cloud environment. I was talking to one of the service providers here in North America, and he stood up in a meeting and he said, "In the old days, you just looked across the pipe, then what's the problem, why isn't my service being delivered?" In a cloud environment, you don't know where it is. You have to monitor a service across CDNs and line lights and 19 other providers and your customer doesn't want to hear, "Well, it's not my fault." They just want their service delivered, and we as customers have become a lot less tolerant to that kind of behavior. We churn which has cost money. For us, very, very exciting. It's a billion-dollar market potential for us. We look at that with a 30 customers that we've engaged with. Those 30 customers make up about a billion subscribers when you look across those 30 customers. We chose them, geographically dispersed, technology dispersed, cable, video, mobility. That helps you build the right product, the right time, the first time. We were oversubscribed on trials. We said we'd do 6. We're over 10 now. And by trials, I don't just mean lab trials, I mean solving real network problem.

We have NEMs in the ecosystem. They are our partners on this. This makes their networks better. We are kind of the BAFS as it refers to the NEMs. We don't make their network equipment, we make it better. We make it easier for them to sell. We have 5 applications in our application store. Three of them are ones that we did on behalf of our customers, the 30 that are in queue. Two of them are industry standards, open. There's the application called Wireshark that operators would love to use everywhere on the network. But they can get it down to all these endpoints. It's downloaded 500,000 times every month. And that's just in these big network core areas where there's probing. Our application allows them to plug in. Wireshark allows them to write their own features onto the network and application. We have received our first orders. Everybody will ask when do you expect revenues? Well, we received our first orders. We expect to go into implementation. There's a very paced implementation that these service providers go in. We would expect first revenues in Q2, but really expect them to ramp in the back half of fiscal '13 for us.

So enough about me talking about what we think the technology is about. Let's hear what our customers think.

[Presentation]

So like Alan, I like hearing about our customers that have big problems and really, really are tuned in on our solutions. I've mentioned that we had received [indiscernible] take the mystery out of it. Verizon was not one of them. But amazingly enough, every time we've introduced technologies like this, you typically are going to small service providers. The good news is one of those service providers that is the first purchase order isn't a small service provider. It's one of the top service providers in the world. And that says just how eager they are to get this solution out into their network. We've been in meetings with some of these customers where they're saying, pick a state, pick a region, get going, because they're feeling that pinch competitively.

So again, very, very exciting. Now it's where the rubber hits the road. So talk -- you probably want to hear a little bit about the business model, what we've done and what we're doing. So last year when we look at the results, as I mentioned 4.7% gross margin improvement, 2.2% operating margin improvement, while we continued these investments in game changing innovations like PacketPortal. During that time, we set ourselves up to really get the next major slug across savings and efficiency or lean scalability in the operation. We were able to put all of engineering together to be able to get more efficiency. And more preparation that narrowed the number of platforms we have. So that as we want to move to the next area of supply chain, we can do so effectively by reducing the number of suppliers we have, reducing the number of CMs we have, it was just imperative to do that. So we spent the year pulling that together, together with putting in the world class, worldwide systems, things like Oracle and Agile, to be able to really get efficient in what we do and do it right for our customers.

And so we've made of those major investments in the year. We clicked off of those milestones, got these improvements that it's really to set the table for getting sustainably to our business model. So when you look at our business model going forward, please note, there's been a bit of a change in the business model. So above $215 million, we believe our gross margin should be 64% to 66% and operating income to 20% to 23%, and that'll be by Q2 FY '13. And why are we confident and comfortable talking about that? Because again, remember, we put together all of the engineering, the systems in place to take our outsourced model to the next level. So first, we're reducing our contract manufacturers and footprint. We brought on individuals, both in engineering over the last year, experts in supply chain that were from contract manufacturers, from the industry, been there, done this before to really take the next cut of leverage in our business model. And so we'll be reducing our contract manufacturers and their footprint by 50%, by that period in time and have plans well beyond Q2. At the same time by putting engineering together, we found great efficiencies in reducing the number of options and platforms that we have, we believe we can drive our vendors down -- number of vendors down by 30% to 40% by then. These are all things we've been working on, lined up, detailed plans in place to go execute. And why we're confident that that's going to take the COGS profile down for our business.

At the same point in time, I just went through a bunch of new software technologies. TrueSpeed, Home PM, which is again the video solution that provides constant monitoring of the video network, PacketPortal, TechComplete, all these technologies are software. And it doesn't take a lot in the comm test model at 215, a new software business to the company to be able to contribute 1 point of gross margin or 2 points of gross margin or 3 points of gross margin going forward.

In addition, we're coming out with new products and mobility. You remember, I've mentioned through the presentation a number of these products, all of them above are average model. So we've got locked and loaded, things, supply chain, activities, it's about 175 distinct items that we're working through in a plan that we're going to get there. We're confident in that. And at the same time, I think you see a lot of this new innovative product. You saw Alan's gross margin improvement over the years by being the leader in innovation. He's my hero. Don't get me wrong, Roy can dunk a basketball. Don't let him downplay himself. But we're confident we're going to get there.

On the other side, we're going to continue to invest in innovative technology. We are in that leadership position. We have a foot in each of the lanes, as I talked about of the technology implementation cycle. If you look year-to-year, and you look at the last 2 quarters, we're down $3 million to $4 million in OpEx. We have closed facilities. We have begun to take the operating leverage out of the business or operating expense out of the business. And this is -- well, the last couple of quarters had been below that 215 average. So certainly we'll get some uplift from overall operating leverage. But a lot of that is coming from a lot of hard work of putting in the right global systems, by functionalizing the organization and then it's really driving the next chain which is supply chain, which is something that's well within our control.

So again, when I think about the marketplace that we're in, there's no doubt, I think you're all probably sick of me saying it, but these markets are growing. It's never been more important to have an end-to-end solution. It's not just about the tool belt that our techs wear, it's about making that data that we're collecting. Many of these guys when they use that instrument, we're throwing it into the back of their F150. That's data -- that's service operator, they get a repeat call from that customer. They're going to send another truck. We're able to network all that together, because we have an end-to-end solution. Strong value propositions mean Excel for our customers not PowerPoint. And it's important they look us in the eye and feel like they got a trusted partner that's looking out for their long-term and short-term benefits. There's no doubt PacketPortal, TrueSpeed, the technologies that we're talking about are disruptive. And it does change the paradigm for our customers which is exactly what they need. You can see they're participating in this, because they need it. I believe we have an attractive business model, and it's only going to get better. And we're taking the action and are responsible for driving that through, and I gave you the target of 15 13 [ph].

So I've only been here about 1 year and 3 months. I also have never been more excited. I came from the world of introducing a lot of these technologies to now for those same customers that I've worked with for 20, 25 years to be able to come in and say, "We're helping you bring it all together and work with great people and collaborative innovation." It's really, really inspiring. So thanks for the time.

David W. Vellequette

All right, thanks for the introduction, David. We're about 10 minutes ahead of schedule now. We're back on track. So glad to see we're back on schedule now.

All right, so far, what you heard from is our 3 GMs, and they talked about how they are adding value to the customers. And key to that is that we have to translate in adding value to our shareholders. So I'm going to talk today about 3 things that I need you to take away from today's presentation. The value of innovation. I think in the business model that you saw from the gentleman today affected -- our products are helping evolve the networks in the future. Roy's products are protecting us in either in pharmaceutical or the currency areas, right? That success in the R&D is helping us gain market share. And I think the proof in the pudding is the fact that greater than 50% of our network revenue is from products introduced in the last 2 years. So you can see that the products were producing are the products that our customers want. As you gain market share with your unique IP, what happens? You improve your operating metrics. And as you've seen over the last couple of years, we've gone from a 2.4% operating profit, right, just in 2009, to over 12% in 2011. And we've improved the earnings per share as they went from $0.20 to $0.93, and our balance sheet has gotten stronger.

Not only do our innovations help us with our existing technologies, but they also help us expand our technology and provide new solutions for our customers. Alan talked about fiber lasers and gesture recognition. Roy talked about threads. And David talked about PacketPortal today. Those products have allowed us to increase our total available market to over $23 billion.

So let's look at the financials. What did you see? We saw the revenues grow over the last 2 years by about 41%. Our gross margins grew by almost 5 percentage points, and our gross profit grew by 57%. So that's the leverage from the growth in the revenues to gross profit. That increase in the gross profit let us increase our R&D by over 46% during that time period. Right now, our R&D is running at about 14% of revenue. That's what it runs for the CCOP area approximately. In David's area, because of the high software content, his R&D runs slow through 15% to 17% in the quarter. And in Roy's area, it's about a 5% plus R&D investment. So we're increasing the R&D that's helping us gain the market share. It's helping us grow our gross margins and that's showing up in the operating margin as you can see here, as it goes from 2.4 to 12.7. That's a $200-million annual increase in our operating profit. And the EPS, you can see there.

And now let's look at how the segment performance goes. First, you can see that the AOT segment provides just under 13% of the revenue, CommTest about 45% and CCOP, a little bit over 42% in FY '11. But now if you look at the profitability, you can see that each of these segments provides a significant amount of operating profit. With the AOT segment, again, less than 13% of the revenue put an operating profit of nearly 24%. Now, just to be clear, I've excluded the corporate charges here just looking at the operating profits of the 3 groups. And, again, you can see the metrics of the growth from '09 through '11 for the revenues, the profits, the R&D and the operating profit.

If we then look at the next slide. If we now look at, again, what Tom talked about today, our products, our worldwide products, all right, we have 49% of our revenues from the Americas, 26% from EMEA and 25% for APAC. So we are addressing the issues that are worldwide issues with our customers. 4,000 customers, 150 countries. We have products that are primarily focused in network solutions, that's 78% of our revenue, and 22% of our revenue is for non-network related solutions. That would be Roy's products in AOT: The commercial laser products, the gestures recognition products, as example.

If I go to the balance sheet. As of the end of December, we had over $755 million of cash. We continue to generate cash from operations. Our capital expenditures, as you can see, have been a little bit higher than what we've traditionally done. Those expenditures are reflective of the investments that Roy is making in his equipment. And the investments we have to make in the equipment for the CCOP area so that we have the equipment necessary for those next-generation networks. We currently have debt on the books of about $296 million. That's associated with a net share settlement convert that's due in May 2013, so that will be callable and therefore in the way that's settled, it's settled in cash. So that'll take about $325 million of cash when we get to May 2013. So -- but still, if you take that, we still have a very healthy balance sheet from the cash standpoint. Our goal is to continue to generate cash. We've done it consistently. We look for areas of opportunity. We think we have a nice opportunity as we work to reduce our inventory levels from their current levels. If you've been tracking the company, you know that we've grown the inventory quite a bit over the last year. This is an opportunity that we're taking now to reduce those inventories.

Now, let's talk with the near-term challenges. I just talked about FY '09 to FY '11 and what we went through. But as you know over the last 6 months, we've had a number of what we call near-term challenges. I think this list here is something you're all familiar with, right? The European economic situation. With the situation in Europe, the way it is, the carriers have paused in their investment levels. The rate of carrier investments domestically, I think, you've all read the reports. I think it's interesting from March or for the September quarter to the December quarter, the CapEx by Verizon and AT&T combined was flat. The prior year, that CapEx grew by $1.6 billion from the September quarter to the December quarter. So we believe that there's opportunity there for them to now start to increase their investment. The network equipment manufacturers have been working their inventory levels down. We now believe that those inventory levels have come down substantially and that there's opportunity there. And as semiconductor equipment manufacturers who buy a lot of our solid-state lasers and gas lasers, they've been slowing down their purchases.

More of a proof point of why we think these challenges that we've seen over the last 2 quarters or near term, because the Q2 bookings, for example, were the highest we've had in 4 quarters. The guidance we provided for Q3, if you take the midpoint of that revenue, that revenue is higher than the Q2 revenue that we just had. LTE investments are accelerating. Carriers have stretched their networks. The network equipment manufacturer demand for the last 2 quarters has actually been increasing. And the currency pigment demand, if you listen to our call, we talked about how the book-to-bill in AOT was 1.15, all right. So that's the strongest it's been. We have record bookings in the quarter.

So what are we going to do? Well, we're going to continue to invest in R&D. As we've shown here, investing in R&D is critical for us to grow market share to continue to be a valued contributor to our customers. So that's why we keep calling it collaborative innovation. We have to be there. This is what our customers need from us. Alan talks about the products he is coming out with. David talked about the investments he's making with his customers. You saw the customer testimonials. That's a great example of how collaborative innovation works. We're going to be opportunistically acquiring. As Tom talked earlier, we've focused on acquisition to accretive in a very short term. The last few acquisitions that you saw were primarily in the test and measurement area. That area tends to be very fragmented, so it's a great opportunity to have the broadest portfolio in test measurement, and that really helps us with our customer base. And Alan's area, we did a small acquisition in the solar area so we could actually really have a very leading edge product in the CTV world. At the same time, we want to focus on the operating results. You saw the operating models that the gentleman presented today and how we have plans and how we're going to get to those operating models, improving gross margins through innovations, leveraging manufacturing, and leveraging our SG&A.

So if we look at the operating models, again, as you can see here, the CommTest operating model hasn't changed, it's $250 million with an operating margin of 20%, 23%. How we get there is higher gross margins through the actions that David had identified, because we're going to continue to invest in the R&D. So with that increase in the R&D investments, we know that we have opportunities now to increase the gross margin because of the makeup of that portfolio having more software mix and also taking advantage of reducing our vendor concentration -- or increasing our vendor concentration. In the CCOP model, because of the high levels of R&D required for the products of the future, we've increased the revenue targets in CCOP from $190 million per quarter to $210 million, and the AOT model has stayed the same at $55 million of revenue, having an operating margin of 32% to 35%.

What you see to the right of these numbers are what we did in last year. So you can see that 2 of the 3 segments have been able to execute inside of this model, so we feel very confident that the steps we're going to take will get us for all 3 segments going to operate model. And that gets JDSU to revenues of $480 million a quarter with operating margins of 14% to 17%.

We have a short and sweet presentation. 3 things to remember. Innovation is key to how we gain market share with our customers, which helps us then drive the top line growth with our unique IP which works to the operating metric, which increases our earnings per share, results in a stronger balance sheet and adds value for our shareholders.

So with that, we're now going to move to the Q&A session where we're going to bring all the GMs back up here and Tom, so that we can open the floor up for Q&A.

Question-and-Answer Session

Unknown Executive

[Operator Instructions] Okay, so let's open the floor to Q&A. Will?

William Stein - Crédit Suisse AG, Research Division

It's Will Stein from Credit Suisse. Thanks for this presentation especially the last part of the CommTest bid, which shows the detail on the margins, that's very helpful. I wonder if we can dig into that a little bit though? Maybe talk about the split of the gross margin improvement between new product and supply chain leverage? And then also on the operating efficiency bid, where you're saying 2, 3 points in that part which is going to come from revenue growth. Can you talk about either fixed versus variable in OpEx in this business or maybe a contribution margin target in that business? That would be really helpful and kind of to the point.

Thomas H. Waechter

Yes. On the supply chain side, we obviously have a plan well beyond Q2, but the Q2 current targets are between 2 and 3 points of that gain is in supply chain. And that really is about taking a very large footprint that I just said we had outsourced primarily the products from in manufactured to out of manufacture, outhouse manufacturing in some various CMs and now it really is about moving to 50% less of those guys. And the only way we could do that is if we had to functionalize and put all engineering together, because honestly we had too many options for our customers and we had too many parts available across them. So we've been able to do that over the last year. So we're going to get a piece of that 2 to 3 points out of the CM reduction. And again, we brought in experts to do that over the last year. And number 2, the number of vendors we're currently dealing with and the supply chain methodologies we were using just weren't there and we didn't have the systems in place to be able to give us a little assistance to get there quicker. And so it really is -- those are the 3 major enablers to get to the 3 points there. On the mix piece, again, if you think about the model and Dave will jump in, I'm sure. But if you think about a model of 215 on any given quarter, and you think about those 4 software applications that I talked about, $2 million to $3 million of revenue, $2 million of revenue fairly share a point. So if I mentioned 2 to 3 points, again you've got the remaining in the mix between the software revenues, so we're not being overly aggressive that by Q2 how long do these software technologies take to adopt. In addition, as we scale the Dyaptive acquisition and the other mobility products that we're doing, those gross margins are all meaningfully above the threshold of 64 to 66 points of gross margin. Dave can help out a little bit on operating leverage side.

David W. Vellequette

Yes. I think if you just look at the financials of the last quarter, and if you had a $215 million revenue number, right, and if you look at just OpEx that we had is about $90 million for the segment maybe put on $2 million more for the variable comp that would come with the higher revenue. And you can see that roughly the 63%, 64% margin range would be right on top of the 20%. I think one thing to note is in the quarter ended September, where we had even lower revenues than last quarter, we had a 62%, a 61.9%, 62% gross margin. The point is over the last 5-plus quarters, 6 quarters, we've been able to consistently be over 60%, sometimes almost 62% but this mix that we see here, we think there's an opportunity to get that, and the changes it's that's why we showed a higher growth margin opportunity.

William Stein - Crédit Suisse AG, Research Division

It sounds like what you're saying is that the -- almost all or perhaps all of your OpEx in this segment is fixed, am I hearing you correctly?

David W. Vellequette

I talked about the fact that as you increased the revenue, you have some variable sales comps, right, which we'd add to that and probably also have bonus compensation, et cetera, that would incrementally increase, too. So from where we are today, we would probably have a few million dollars to that.

William Stein - Crédit Suisse AG, Research Division

Okay, great. And then a couple of quick follow-ups to that. We're talking about targeting this in Q2, which is a seasonally strong revenue quarter, but I think the real target here is to get to this margin level on the full year basis, not just in the strong quarter, not one and done. So can we assume that the Q2 target is when you start achieving it on an annual basis? If you could just maybe, Q2 of the following year, you should certainly be above this number, right?

Thomas H. Waechter

Correct. So I think what you're -- Again, I wouldn't want to predict out a full 2 years ahead of ourselves, but the Q2 target is worth consistently getting that target, not a one and done, but we're getting in that 20% to 23% operating range. If you'll look at, I think, what Dave went through the OpEx piece, if you take the average of the first half of '12 so far, you're talking about 1.5 point to 2 points of operating leverage. In addition, we are taking other actions as we talked about on a kind of global scale, global systems to be able to effectively manage our OpEx. So it is consistent as of Q2 '13.

James Kisner - Jefferies & Company, Inc., Research Division

James Kisner from Jefferies. I had a similar line of questioning about CommTest. First, I was under the impression -- at least I'd heard comments from the company last year that the structure in CommTest already existed at 20%, 22%, it now feels like you're saying that it's not really going to have that structure until Q4 -- of calendar Q4. Is that as a result of acquisition, has something changed? Also just to clarify, let's say that in calendar Q2, fiscal Q4, your revenues are $215 million, what would the revenue or the margin be -- I mean, would it be if the mix is not yet better with software, would it really be like an 18% to 21% range, perhaps, because you haven't seen the mix improvement yet?

Thomas H. Waechter

If you look at, again, just using the last quarter as an example, right, we were over 14%, the margin was only 50%. We know that we talked about some charges we took, right? So the period and mix impact that's why I was pointing to the September quarter, how much lower revenue being at 62%. You could see that we are in the range that we've been getting some leverage on with a higher revenue, right, to be even above that. So I think we're in the vicinity. What we're deciding to do here is we're looking at increasing our investment in the R&D area, and with that, we think also the mix of the product has a healthier opportunity with the software products coming to market. So that helps make it as more confident investing more in R&D. And therefore, we have the higher gross margins, but then we're going to offset some of that higher gross margin benefits with continuing to invest in the software area and any further opportunity.

James Kisner - Jefferies & Company, Inc., Research Division

Okay. But to clarify, so if we were to hit the $215 million tomorrow or I guess in Q1, surprisingly, or Q2, should I assume that you've not been here [ph] for model?

Thomas H. Waechter

If you take the December quarter, for example, and if you say, okay, we hit $215 million, we probably would have been in the 17% range, 17% to 19% range, right? So we're just below it.

James Kisner - Jefferies & Company, Inc., Research Division

Okay, great. And one final question. And also it's for Alan, what's the CCOP on your -- the blended growth revenue you said 12% to 15%. Could you care to give us a little more structure around or texture around either your product lines, even just commercial versus Optical Communications what would have been optical? What you think should have the highest growth or what preference are within CCOP?

Alan S. Lowe

Sure. I think, as I said, fiber lasers are going about a little over 12%. I think comps is in the low teens as well. I think individual products, ROADM should grow faster than that, then we should grow faster than that. So I think if you put it all altogether and sustainably, comps should be in the 12% to 15% on itself. But that doesn't mean 2% a quarter, right?

Unknown Analyst

First, Dave, I wanted to clarify versus last year's CCOP, you hit the operating model target of $190 million, you mentioned $210 million. Sorry, I didn't follow the logic for higher revenue for the CCOP margins?

David W. Vellequette

Why we increased revenue target? Yes, we increased the revenue target primarily because of the fact that we're increasing the level of R&D investment. You look at the R&D investment, it's going up over the last few years from being somewhere around 12% to 14% with that investment level, right? And right now our view is I'm talking to our customers that we're probably going to have to keep that R&D investment level at that range. So that will require us to have a higher revenue level in order to get to the operating profit.

Unknown Analyst

And is that somewhat more of a recent thought process? Given recently and during earnings you had indicated the $190 million.

Thomas H. Waechter

Well, it is relatively recent. I think as we've been feeding our customers with the TrueFlex twin ROADMs, they've come and engaged with us for more super transport place based on that. Those developments are 12 to 15 months. They consume a lot of R&D materials spend and people to write firmware and mechanical engineers, electrical engineers. And so we think that's a good thing. And it'll turn into higher revenues for us and higher margins for us 1 year or 15 months out.

Unknown Analyst

And higher price reductions, that's not part of the offset. You need a higher level of revenue to hit the gross margins with the margins. It's primarily the higher OpEx-related run.

David W. Vellequette

Yes, I think that our belief is that this year will be in the 12% to 13% price reduction from year-over-year, of which you usually and typically front-end loaded. So I don't think it's as much surprising as it is the fact that we're continuing to increase our R&D spend.

Unknown Analyst

And you all for hitting the operating models for different divisions, you all talked about Q2 fiscal '13, the end of this year. There's obviously a revenue assumption behind that, and that is the variable part -- I mean, is there implicit in that thought process that given how you're thinking about the business? Those revenue levels I really think -- how should we think about the ability to hit that revenue number?

David W. Vellequette

I think the key is we're saying we're going to have a model to sustainably hit them at those levels. If Alan is right, with the cycle we're in, that would certainly give me a lot of promise. But right now, the more important for me is we go get our model sustainably correct, right? And then as we get better visibility into how the revenues are going to be coming out as we get to the end of the calendar year, we'll get more guidance there.

Unknown Analyst

Great. And that perfectly is my last question. So after 3 weak quarters for Optical Comm and early 2011, we've seen 2 flattish quarters for demand that's atypical recovery typically at their down quarter you should see more of an uptick. Certainly the environment has been weaker, how do you think about kind of this recovery will look? And when it excels what are the leading indicators you're seeing?

Thomas H. Waechter

Sure. I think we and someone asked me on the break, why we didn't have visibility to the over inventory situation a year ago. I think we've gotten smarter how we monitor our customers' inventory level and their customers pull on that inventory. And so I think watching on that level of inventory and making sure it doesn't get too big is important. And I think as we move to more of BMI shipments, last quarter, it was 37%, we expect that this calendar year will be growing that percent. Our customers will only pull inventory when they absolutely need it, and that will give us more visibility into it. So I don't know if I answered your question but...

Unknown Analyst

Yes, it was more about the trajectory of the improvement. After September, we've seen -- if you add back in the stuff that you could not ship, the order run rate or the demand run rates will be relatively flat for Optical Comm and kind of the trajectory of an improvement of when and how.

Thomas H. Waechter

Yes, I think Dave had his chart. The CapEx for AT&T and Verizon was not as expected, right? It's not typically down in the fourth quarter. I don't think that's understandable for the service providers not to spend money. And think to my hope is that the continued bandwidth demand growth that seemed to be exponential are going to require them to release their capital spending and we hope that our NAMs win with our products.

Unknown Analyst

And certainly the secular trends do support that. I was just wondering if we're seeing any leading indicators of that happening or we're still waiting to see the demand trends pick up?

Thomas H. Waechter

I think I don't think we're ready to give new guidance based on what we see today, so sorry. Is that what I was supposed to say, Dave?

Unknown Analyst

So just a quick question for David about the supply chain optimization. I have 2 questions actually. One, Alan talked about his contract manufacturer which is Fabrinet in Thailand coming back online, which is one of the drivers for margins coming back and then you spoke about reducing your outsourcing. I just want to clarify you're in the CommTest business, you're now using Fabrinet, you've been talking about a different set up contract manufacturers?

David W. Vellequette

They get that question a couple of times in the last quarter. So we are not currently using Fabrinet. We have, as I mentioned, a number of contract manufacturers in a number of locations, too many. And in Q2 it will be 50% less than it is today. And that will give us some price leverage. We're in contract negotiation now, so these are not soft initiatives. We're in contract negotiation now and we'll see the benefit of moving more volume through less players. And the only reason we've been able to do that, and a lot of people are asking why now, why second quarter? Is we first had to get all the engineering documentation, all the processes aligned to make share we do that successfully, satisfy our customers and get the cost reduction target.

Unknown Analyst

And could you possibly touch on what gives you confidence about the cost savings? Because bringing it in house, you already start on a lower scale than the CMs would have presumably running their larger business. I'm just curious.

David W. Vellequette

So, yes, let me make sure I'm communicating effectively. So it's already outsourced, so we're not going to bring anything back inside of JDSU and go in back into the manufacturing game. We're actually dealing with Tier 1 contract manufacturers. The fact of the matter is, as we've had lots of different business lines, we've had a number of different contract manufacturers, too many, in too many physical locations. So none of this is our facility stuff. We're putting that all together with less contract manufacturers, thus, getting negotiating leverage as we renegotiate contracts with far fewer players, 50% less players in locations.

Unknown Analyst

Okay, just to clarify, the outsourced business is not declining, it's that you have 50% less people doing the same normal work and get with the pricing?

Thomas H. Waechter

Less partners which will get -- yes, right. Which will get us volume efficiencies by taking our buying power. The second element of that is less number of vendors from us, from a parts perspective, which is giving us increased purchasing leverage as well as we brought in some experts and this is what they do, this is what they have done their entire career. Squeeze the supply change is just as hard as we're getting squeezed by our customers, right. In fact, harder. We like to share the pain.

Kevin J. Dennean - Citigroup Inc, Research Division

Kevin Dennean from Citi. A quick question for Roy. On the expansion of your optical variable segment facility. Do you have a kind of customers that have pre-ordered buys against that capacity coming online? Do we need to think about a ramp in terms of yield, are there any sort of margin drags that we should think about as that capacity comes online?

Roy Bie

Yes, we don't really get the prebuys. But we're in a long term contract relationship with our partners. So we see forecasting from them well in advance, because you might imagine a piece of capital like that is actually almost a 2-year project. So we've been forecasting this from 2 years out, and currently, we are actually fully loaded right now. So timing seems to have laid in very nicely against what we saw 2 years ago, because we're actually in a capacity constraint by at the moment. So you're right, it's a large piece of capital, it takes a little while to fill it up. But right now, the most we could forecast is maybe a one quarter pick up against our model, but other than that, we do not see that. It's going to drag us below our model.

Kevin J. Dennean - Citigroup Inc, Research Division

Great. And then a quick one for David. David, on the software business PacketPortal, I think I heard you say that, that should ramp into half back at the '13 calendar fiscal?

David W. Vellequette

Yes, sorry, fiscal.

Kevin J. Dennean - Citigroup Inc, Research Division

And then with the probes being -- it looks to me as though the probes are actually in the transceivers. Does that require a swap out of the transceiver or is that some sort of a firmware download?

David W. Vellequette

Yes, so a couple of points. Really good question. If you think about the technology that we've shrunk down again from wherever it is, from large size to small size. The first instance of this is on SFP+ so on a transceiver. If you think about that 1 gig ports that are out there, that is the -- I mean, that is getting near the access nodes now, near the cell sites, near the qualm banks of the network. So there is 43 million of those ports out there today. There is not a large expense when you talk to the guys, you saw one of the major carriers up on the screen here. When you talk to them about the cost of doing this, that is not a large or great expense. So you will indeed swap out the transceivers that exist now, they do, do some of that refresh out there today. That's an opportunity for the NAMs as our partners to make a little bit more money as they go out into the network workspace, as well as there's about 5 million a year of 1 gig SFPs to play fresh within the platform. So we've been working with the NAMs, we already have 1 that's certified, the hardware, the transceiver. Beyond the transceiver, that same technology can be dropped into an SVGA loaded on a set-top box in a television. Those are the long-term view for this platform.

Kevin J. Dennean - Citigroup Inc, Research Division

And just one quick follow-up, if I may. So it sounds like end game is to actually have this software sitting on end-user devices, right? So you mentioned set-top boxes and then you showed up on the graphic some handheld devices, smart phones, tablets, whatever. What will be delivery model there? Will it be OEMs, carriers or do you somehow expect that consumers would download the app, which I think would be not...

David W. Vellequette

In most cases, right now, it's been the network service provider that's been working with the OEM to do that. So we announced that, I think 2 quarters ago, just an example of this. So the good news about PacketPortal is we've done kind of many instances of something on a smaller scale before that. So Home PM, is actually a system that today has a software-based client on a set-top box that we work With Telefonica on, and we actually signed a contract with them that said, we would save them 7% of their truck rolls is our commitment. And we ended up saving up, I think, 20%, 21% of truck rolls out to those locations. So that was a case where the OEM or the NAM -- excuse me, the NAM worked with Telefonica. It's actually put the client on the set-top box, then our software was resident in their network management center, it was able to do that. As we get into set-top boxes and television sets, we will work those ecosystems. We've got enough opportunity, so to be clear, the $1 billion TAM I talked about is 100% us looking at the carrier and NAM market for utilizing this in the access portion of the network.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Patrick Newton with Stifel, Nicolaus. To dovetail off of Kevin's question on the PacketPortal, when you look at that $1 billion TAM, how do you split it between software sales, maintenance kind of follow-on sales and then your microprobe hardware and will that microprobe hardware, and will that microprobe hardware be recognized in the CCOP segments or in the comps segment?

Thomas H. Waechter

So good question. On the software side, the opportunity that I just gave you is just the software. It is not the device. So we don't like to change our customers buying patterns, the carrier's buying patterns, it disrupts the supply chain. But why? Because we would like fast adoption of the technology. So the first instance of this is, is on an SFP. And SFP's will actually be qualified through the NAM's and sold to the carriers just as the existing SFP in Alan's business are. Our core piece of this technology that we got for PacketPortal was part of our acquisition of Agilent NFB. And we've been working very hard to build the right software architecture systems, and again, with 30 customers to make sure it's right when it goes to market. The first instance of this is coming out in an SFP, that is with a partner that is now -- that's why Alan is looking at me mean, but we had a partner that was part of that contract that is a buy go that will be out with the first SFP. And all of our customers would like to have a secondary supply of SFP just like on suitables and others that Alan has. So we're working together and we will have a second source once that period ends our contract obligation with that partner. So when that revenue comes for pluggables, I can guarantee you that'll be in Alan's business.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

All right. Then a follow on for Dave on the business model. You walked us through kind of a promising picture with some qualitative reasons why you expect the business to rebound. You talked about carrier investment like would be unsustainably low. The inventory direction largely done. Can you give us any quantitative things you're seeing in the market that could help lead us to improving trajectory as we move through the remainder of the calendar year?

David W. Vellequette

Well, the biggest quantitative items was the fact that you saw that our bookings have been growing. The book to bill, the first indicator is when your bookings start to grow off of the bottom, so they've grown for 2 quarters in a row. I think the other factor that we look at is if you look at the investments that carriers are talking about, right, although the amount of money they're investing isn't necessarily growing for AT&T and Verizon, but based on a recent report I read, where they're investing is in the areas is you just heard David and Alan talk about today. So if they execute according to that, we think we have the products they're going to need for these network build out. So those that the promising indicator that we have in front of us. Positive book to bill, and the fact that we're the carriers they're talking about investing in the areas that we provide solutions.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

And your book to Bill was coming off of a relatively low revenue base. So if we looked at bookings on an absolute basis in December relative to the September quarter, how would those 2 compare?

David W. Vellequette

What I noted is the December quarter was our strongest bookings quarter in 4 quarters.

Todd K. Koffman - Raymond James & Associates, Inc., Research Division

Todd Koffman with Raymond James. I wanted to ask about your new target operating model. In CommTest you gave a fairly detailed sort of bridge to achieving the model in the next few quarters. So it seems like you're kind of got your arms around this by the end of the year. But in CCOP, the model went the other way, it's kind of requiring a lot higher revenue to hit your old model and you don't have a bridge. I was just wondering, in CCOP, what do you think the timing is to actually get to your target operating model in CCOP?

Thomas H. Waechter

Well, I think the chart said Q2 as well, so that's the plan. I think we have the product releases, the change to the margin profile, as well as the mix between lasers which had a higher gross margin than comm increasing. And so those 2 things combined with further efficiencies and the slight changes and redesigns, on some of the higher running products, we believe will get us the margins to be increasing over the next 3 quarters.

David W. Vellequette

Todd, we talked about on the call, if you may recall, that the gross margins for the laser business, they go on from 49%, it was around 39%, 38.9%. And so we expect as the mix comes back, which was the Semicon equipment and manufacturers coming, that'll help us taking the cost put as the fiber base will help us. And we also talked about in the optical site where we have now got the -- we're getting lower prices from our suppliers, but we now have to work that inventory through so that those prices are in effect. So those are some of the factors.

Todd K. Koffman - Raymond James & Associates, Inc., Research Division

Just one last related follow-up. Since the business moves pretty wildly even though the model actually stays, the target model stayed the same over the last year at least. In the last couple of weeks, I guess 2 weeks have gone by since you've reported your earnings and maybe -- just has there been any change in the tone of business one way or the other or has anything changed?

Thomas H. Waechter

We're not updating guidance. So, yes. So that's what I should have said...

Kimberly Watkins - Morgan Stanley, Research Division

It's Kim Watkins from Morgan Stanley. I wanted to follow-up, first, on the 40 gig, 100 gig modules with a point that was highlighted, the key growth area. I just wanted to state your take on between 40 gig and 100 gig, what's the timing and kind of scope of these 2 different markets. Do you see 40 gig having a longer tail or does that -- is that just kind of the near-term driver whereas, I mean, 100 gig, we talked at the break about increasing R&D investment there. Do you see that as more of a near-term opportunity than you originally thought?

Thomas H. Waechter

A long set of questions. Today, we're in both 40 and 100 gig at the component level. So we sell 1,400 gig receivers for the integrated coherent module manufacturers as well as our competitors, and we sell modulators. We also have internal developments on our -- some lasers that for a narrow line was to be able to do 40 and 100 gigs. That's number 1, so we're in production of those. We're also taking those components along with coherent basics and making our own modules. We think that those will be in production in the next 3, 4 months and we're going through the final development stages and qualifications of those modules. We are in production today on 40 gig, line-side non-coherent and 40 gig client-side modules today. And have a whole host of smaller form factor line-side and client-side products right behind that.

Kimberly Watkins - Morgan Stanley, Research Division

Okay, maybe I should clarify my question. What I was -- what I'm trying to get to is 40 gig coherent module merchant market size versus 100 gig coherent merchant size. A couple of your competitors just to give you the context had said it seems like they're coming in both camps. Some of them are saying 40 gig is actually where they are focused near-term and this is the largest opportunity, others have said, I think that's going to be a transitory market, a lot of the NAMs are doing their own development there, and it's really going to be 100 gig. So I just wanted to get a sense of where you see that crossover point when you see the 100 gig module market developing from a merchant market perspective.

David W. Vellequette

Now I understand. So I think 40 gig has a place and has a place for a long period of time. We're investing in 40 gig coherent modules today and we believe that it will address the market for the non-vertically integrated NAMs, as well as potentially those guys who are making their own modules today. I think those have a long tail. 100 gig, we're doing both specific-line card for a given customer, as well as of 100 gig coherent module. I think those are probably end of this calendar year before they're up and going. And those will be around for many, many years and will become the 10 gig of today, probably in 4 or 5 years. So I think those things are going to be around for a long period of time. Industry analysts basically say that they're going to be around as the mainstream transmission rate through 2020.

Kimberly Watkins - Morgan Stanley, Research Division

Okay, that's helpful. And then, Dave, a question for you. On the target operating -- or Alan, on the target operating model for CCOP, if we had stayed with the original 190, where would the operating margins target have gone to?

Alan S. Lowe

Well, that's going to depend on the mix. So as in any quarter, we basically have $40 million of lasers headquartered. What do I have? What we tried do is come up with -- we're basically looking at it as an 80%, 20%. If I'm at 210, it's about 80% optical and 20% lasers, how would that we see that coming out. And so that's what we used in that model.

Kimberly Watkins - Morgan Stanley, Research Division

And if you use the same model on the 190, would it have been 1 point or 2 points?

Alan S. Lowe

I actually would have to do that for you.

Troy D. Jensen - Piper Jaffray Companies, Research Division

Troy Jensen from Piper Jaffray. Quick question for Tom. You mentioned doing accretive acquisitions, would you consider doing a dilutive acquisition to, maybe, kind of cleanup competition, consolidate the CCOP industry?

David W. Vellequette

I think specifically around CCOP, I think there's a lot of restructuring that needs to go on if you do that type of acquisition. I mean, typically, it's not where we wanted to put our energy level. It's because it's pretty unpredictable, I think it makes your financials very complex for a period of time, so we pretty much stayed steered clear of that. I would never say never, but up to this point we've not seen an opportunity that would justify in our mind the opportunity cost of spending all that time on restructuring rather than looking forward with all the opportunities that Alan has shown in his business with the new products and where we're headed. I think also most of those competitors out there in their market have some pretty ugly balance sheet. And we have a very clean balance sheet that we keep improving. I definitely wouldn't want to take a step backwards in that area. So for those reasons, not very attractive. I never would say never because things happen and it may change, it may become very strategic for us. For some reason, we may want to prevent another combination for it happening. This could be damaging, but right now, up to this point for the reason I just mentioned, it's not that attractive.

Troy D. Jensen - Piper Jaffray Companies, Research Division

And then just staying on acquisitions, correct me if I'm wrong, but I think you guys may have done fewer acquisitions over the last year or 2 than maybe have done historically? And do you think like with things improving now in the economy that you'd be more aggressive on the acquisition front?

David W. Vellequette

I mean, we've got a lot in the pipeline, so we're looking a lot of opportunities across a pretty broad expands. But we just want to be sure that it fits in strategically. It makes a lot of sense to us, obviously, quite a few of this has been around the CommTest arena because it's pretty fragmented and there's a lot of areas to build out like wireless, and some of the capabilities we're adding now. So we're not feeling like we need to -- like the cash is burning a hole in our pocket, we want to do it right. You can quite honestly only do so many at a time to plan them out, do all the due diligence and then integrate them. So, again, we want to make sure we don't cut that short. So we'll do it at the right pace based on making strategic sense.

Unknown Analyst

Can I just ask a follow-up question on choice on M&A and CCOP. It does seem as though you have that good handful of really struggling players that are losing money, but you said there was some financial distress. Has there come a point where the systems vendors would start to take business away or they actually prefer them to kind of operate in financial distress and most of them themselves operate in financial distress and lose money anyway. So they prefer them to absorb the losses. Or is it there comes a point where, no, they're not going to win incremental new business if they could see the light at the end of the tunnel's going to close.

David W. Vellequette

I think, typically, the tipping point is when they see the cash running out. And I do see a number of competitors out there on a landscape that it does appear like the cash is running out. So I think that's when it gets to a point where they'll make some of those kind of decisions. Up to this point, there's been Some ugly balance sheets, but folks have been able to get cash or dilute -- raise cash or dilution. My sense is that's probably at the end of this road, and there's some pretty desperate situations out there. So that's where I think it's usually the tipping point.

Unknown Analyst

Just a -- so Roy doesn't feel left out. Here's a question on -- so I was kind of impressed by the growth rate you're expecting, 6% to 10%. I mean, it seems like the last few years, you're growing about 4%. If I go back, that was 6%. You've grown from the low end of that, 7%. I guess I'm just curious, what gives you that confidence? What are the big drivers there? And I guess sort of conversely, and this is for Dave, it sounds like CommTest, you're expecting a lower growth, then you said last year, to date then year's, how much of that is colored by the recent slowness? Has something changed in your assumptions, and also could we expect that, perhaps, a stronger year in this particular year if there were a snapback given the very seasonally weak Q4?

David W. Vellequette

For my business, I tried to illustrate that a little bit on the graph around the redesigns. So it's steady state kind of where our business rates. So if you see anything from a 4% to 6%, which basing back to your commentary about last few years. But as we get into these preprints before the leases, we definitely see better activity from a growth rate standpoint during that time period. So I try to impress on that one slide that we're in that window so they come long right there every 7 years. So if you haven't been covering us for a while it looks like, wow, what's going on? But for somebody like me, that's been through 2 of these cycles, they come but they're far apart. So we think we're in one of those redesign period states. And with the combination of us being on the Euro, it used to be at that time, it was 12 different countries, redesigns happening then it all became one. So that cycle became much more evident more in the past, we wouldn't have seen such a spike because we would have the other 12 or 11 redesigns. And then we didn't go through the other AOT. But Alan hit on it, we participate in a gesture recognition. We definitely have confidence in the growth on that business over time, the 3D business of that, the adjacency that Tom referenced, those areas of growth we didn't spend a lot of time on today but do definitely affect my business.

Unknown Analyst

You just reckoned it to be up next quarter?

Thomas H. Waechter

So you have the question on CommTest, so a couple of things. One, we did prune the portfolio, that's another piece that we've done over the last 12 months looking at technology as we see fit. We don't think our appropriate book business model-wise and customer need-wise. I think Dave pointed -- when Dave and I look at that on a quarterly basis, that is about $6 million a quarter. It impacts when you look year-to-year. However, what we've experienced, I think, over the first 2 quarters is when we just didn't see other than a small amount of cable-busted questions, we didn't see the normal end of spending from 2 of our major customers in the United States. And us being a leader in field instruments and that being a large portion of our business, its impactful for the model. Lots of people, I'm sure, want to ask also had they released their budgets yet and where is everybody at. It appears that this is about the time where finance says, okay, now you get your budget and you have to use 2 hands to pull it out of their hands, that never happens here -- it does. And then the carriers now take it out operationally. So we would expect that in the coming weeks to be able to see the operational flow-through of budget really. So I will say everybody's released budgets, but we do feel like we're in that domain right now. And then we're seeing some of the major providers begin to release their budgets. Some are still doing it in priority batting order, right, are saying, okay, projects were LTE buildout for some of their data center initiatives, that's what they're releasing first. I do want to clarify and comment on the mobility sector for us just to make sure everybody understands. And we are going through the strips of our business, our mobility infrastructure, I talked about, roughly and again, very rough, kind of 40% numbers. It's actually made up as I mentioned 2 elements. One is purpose built mobility stuff, so that's the Dyaptive acquisition that we've done. This drive test protocol analysis, because those are all products. Those tend to be about the 20% that we have talked through. The remaining 20% is that blue block along the bottom is all of the input structure that we're using with the wireless carriers to build out their networks. Wireless carriers are actually taking fiber now, all the way out to the cell site, all the way up to the antenna. So the fiber inspection equipment Metro Ethernet, the Ethernet instruments that we test the network with where we have the leading share. So those 2 together, I don't want to misrepresent that all as mobile purpose built. Half of it is mobile purpose built, the other half is the broadband infrastructure -- sorry I added a plug at the end. Did I answer your question?

Unknown Analyst

I think sort of -- what about the [indiscernible]?

Thomas H. Waechter

I got to give the same answer as these guys have. But you know, no change in the guide. Yes.

Unknown Analyst

I have a bigger picture question on CommTest, if you look at 2007, fiscal 2007 was the first full year after the Acterna acquisition. Since then, you've had 2 large acquisitions, one of the NST business and the Finisar tools business which is about $200 million incrementally. And there's been some pruning and several small acquisitions, so we're working off of a $800 million revenue base if you add in the acquisitions? And eventually over the last 4, 5 years, it seems like revenues have been flat if look at fiscal 2011 and fiscal 2012. So first of all, I want to make sure I'm seeing about that right, and what is the underlying growth in this business? And I know there's been pruning, but there've been small acquisitions to offset that. And then there are 2 big large deals which add about $200 million from revenues?

David W. Vellequette

If you go back to -- he wasn't here back then. But basically, what you had during that time period, we did take on that portfolio and we have continuously as we always do, right, continuously, weeded through that portfolio and trying roll the gross margin and the profitability of the business. So then and with that, some of these acquisitions come on. As you bring the acquisitions in and then you start to build off of that. So really, it's been more of bringing in, expanding the portfolio and then trimming out the products that don't hit the gross margin targets. And I think the key has really been in the last, since David's has joined, the execution of moving that gross margin from that 56% level, right, up to the 60% level on a consistent basis. And now to take it to the next point.

Unknown Analyst

Going back to underlying the growth rate, Dave. I mean, if you look at guidance and if you assume uptick even in June, we're looking at a high $700 million number off of a base which should have been about $840 million number 4 years ago. And I'm not even counting the small acquisitions which offset the pruning, so I'm just trying understand underlying revenue growth if you -- not about margins, but underlying revenue growth in this business sort of the last 5 years, essentially seems to have been flat versus 6% to 8% kind of revenue growth number you talked about. I'm just trying to understand...

Thomas H. Waechter

It has been in the low single digit type of number as you're saying. And over last year with the European situation in the purchasing activity in North America, we did see a further slowdown in the growth rate. I think as David showed on his slides, the areas that he's focused on have growth rates that are high single digits and are now closer to 9% and 10% levels. But I think going forward, we have a -- we're structured better to get in the -- above that 6% to 8%.

Unknown Analyst

I understand, but is that low single digit growth rate or flat? I mean, how we dice the numbers over the last 5 years, that's a pretty large sample set. Is that the right number, is it 6% to 8%? Because obviously, some businesses are growing, and some don't, and you're large enough that you're going to have the puts and takes. I'm just wondering if 6% to 8% is the right number? Because the last 5 years certainly don't indicate that.

Thomas H. Waechter

Yes, the -- and again, I think if you bring it all together, it's probably, I think, at the higher end of that, from a go forward basis. And the reason again because of where the investment is focused, going forward.

David W. Vellequette

I would say just to give you the last 2-year perspective on this is, if you look at '10 to '11, significant growth as well as organic growth, which we track. Significant organic growth and taking of market share in that period. So the first half of this year, even in the field instruments business that was very weak because the carriers kind of pulled back a little, especially some of our major carriers pulled back a bit. We were able to hold our own and indeed grow, and grow in the segments that still have a lot of opportunity in front of us. Now, investment-wise going forward, what Dave talked about is absolutely right, we've been kind of moving our investments around. We've always been very strong on that broadband core and where you've seen us make some acquisitions to get some jumpstart is in mobility, purpose-built mobility, media access and content moving up the content layer, and then in data center and cloud. And those dating back to 2007 were not big initiatives of the original acquisitions that were made. So that's where we're putting a lot of emphasis along with the investments and the breakout technologies like PacketPortal. So I think we've got -- I think our portfolio bodes well for us for the future with higher growth strands than if I was -- and it's easy to come in and look back to 2007. But if I look back, our portfolio is in better shape now. NOW we have work to continue to do to be able to make that happen.

David W. Vellequette

I think one other aspect to kind of frame it is we are thinking about those acquisitions. Those acquisitions were strategic, so we didn't buy them for revenue, right? So some of those and 2 of those acquisitions, specifically, we bought to get into wireless, but really LTE, so we eroded some of the traditional product before what LTE group. But that's why we were there, not to maintain revenue. I say that's the same in the storage networks tools, as well we've just come out with 12 gig, 16 gig. That's where we're really going to show the benefits of the company. Not trying to maintain revenue rather that legacy based. So I think there's a little bit of adjustment. When you think it's through the model, when I think about that a little bit, don't keep those both at that level while we're transitioning to the next-generation technology.

Unknown Analyst

So in aggregate, that's 6% to 8%. So it seems like a good number for...

Thomas H. Waechter

Yes, you said it right with puts and takes. So when you pick up an asset like that, we are absolutely focusing on the ones that we believe are growing and pruning the other business of out it -- out of what we do.

Unknown Analyst

Allow me to follow-up on the question about PacketPortal and the probes. So it sounds like it's going in future SFP modules initially, is that right?

Thomas H. Waechter

Yes. To begin with, yes.

Unknown Analyst

So my understanding is that those are under multisource agreements, MSAs and you're talking about inserting the component into this module that will certainly make it different from your competitors. So how do you rationalize that? And then also, do you consider how this might change the revenue pattern for your SFP or for your transceiver business generally? Is there something that's going to allow you to gain significant share, because you're the one that's going to have modules that have this feature in it? And also, can you sell the software without having these SFP modules sold are you concerned license that kind of -- there's a lot of questions, but I just want to understand this razor and razor blade model or what it seems to be?

David W. Vellequette

Okay, very good question. I'll stay away from the razor, razor blade so that somebody loses, right? Because I think everybody wins on this one. Because I think that the players that are making network adapters and pluggables have an opportunity to refresh technology to help their customers, which means they've got some more opportunity in front of them. From our perspective, the software can be and in SFP, it can go in lots of other network appliances. The easiest to get into and you kind of you saw it in the video, just how easy it is for the carriers to go ahead and implement, they're pretty excited about the fact that they can go out into 1 gig optical ports and get immediate enablement. So we have to work with the NAMs, and have been working with the NAMs all along with partnership from the carriers. I mean, the carriers didn't write it into their spec and say, when I now buy in SFP, here's what I want to have in the...

Unknown Analyst

Is in that an expensive proposition, though, to say, well, I've already got this stuff deployed? Why would they go replace it?

Thomas H. Waechter

If you look at CapEx and look at what they had to do out of the network, and you run the business case, is they're adding this element to the business case. This is not a significant digit in the business case. So it's been a lot of these business cases with carriers being a vendor where you hand them the pretty slide which says you're going to save money. We're not doing that in this case. We're really having them put their numbers forward and use their numbers to make sure we're on track here. So we've been really, really tight with our partners on the SFP side and with the NAM side. But certainly if you don't get the devices out in a general area, then it's not technology that defeats the purpose. That what is doing a light BPI function or bringing back the information and giving you visibility to where you couldn't get before. The good news is to that, the good news is carriers can -- you don't salt-and-pepper these. So it wouldn't be like, you just put it at that table and that table. You choose a particular. You can choose a particular city or segment of your network to enable. You don't have to go back and do a whole network at once. So it becomes operationally very easy, because it's not difficult. You could actually pull out the old SFPs on their side. If there's areas in your network that you don't want to enable, you can swap all those SFP pluggables into different portions of your network. But that isn't the major portion on the cost, in the 30 carriers the that we've been working with. That hasn't really been the issue.

Unknown Analyst

Okay. So you're still going to have SFP. Presumably they're different from your competitors, have you considered this could be a big share gain opportunity or do you license this technology to the other vendors? How do you deal with that differential in the product?

Thomas H. Waechter

So again, I want to be very clear. In the first instance of this, the first part that's coming out is actually not a JDSU part. So Alan will be able to be able to be a second source to that part. We will always have multiple sources to the parts. Now because we work together and we collaborate, as I mentioned, on the 100 gig kind of solutions and on other solutions, we think over time, there are great innovations at being able to miniaturize test functionality and put it in pluggables beyond even PacketPortal. So think that's one of the unique advantages we have that's JDSU, it also has made our customers feel pretty secure that as we're coming out with a technology with the first pluggable. But, again, it's a smaller piece of the equation that isn't ours. So if they worry about second supply, they can look in our eyes and know, oh we'll -- for that was Avago as part of the NSD acquisition, which gets back to your question on sometimes you make strategic purchases not just for the existing revenue, but for maybe something else that you believe can really change your business model.

Unknown Analyst

And then one separate topic if I can on AOT. I think historically, you had, had a higher margin targets in this business, I think 2 or 3 points higher than what you have today. It was reduced maybe 2 years ago, maybe 1.5 years ago, I don't remember exactly. And I think the last time that you're at that level, the U.S. 100-dollar bill was being printed, I think that was the difference. With this very strong book to bill at 1.15, could you see getting back to that old higher operating margin level and resetting that target higher?

David W. Vellequette

Yes, periodically. We issued clearly we've got an ASP decline within that time period you just explained. So remember we go to the sequencing of a very long contracts, 10-, 5-year contracts. So once we get the pricing settled, it doesn't -- that's not as volatile as Alan with all the pricing. So there has been a change in the model coming out the last 10-year contract to the one we signed where there was some ASP erosions. And so I would say, if there's demand spikes and we the extra capacity, it’s kind of like we're wafer fab, you could have periodic runs at those numbers. But it's unlikely that, that's sustainable to model. What's up there right there is sustainable.

Unknown Analyst

When was the last time you saw this kind of spike in book to bill? Is it this lumpy normally? Do you often see 15 points spread?

David W. Vellequette

No, usually it's 1 to 107 kind of range would be kind of the sequencing, so it definitely was a good book to bill.

Unknown Analyst

Is it driven by multiple technology or is it all...

Thomas H. Waechter

Yes.

Alan S. Lowe

I don't know about the model, David, but there was another comment on that or not.

Kevin J. Dennean - Citigroup Inc, Research Division

Kevin Dennean from Citigroup. Alan, a quick question from you, I think in response to Kim's question, you talked about 100 G module coming out by the end of the calendar year. Did I hear that correctly?

Alan S. Lowe

Yes, we have it up and running in our labs today. The 100 g is clear.

Kevin J. Dennean - Citigroup Inc, Research Division

So will it be sampling by year end or will it be general availability?

Alan S. Lowe

Calendar or fiscal?

Thomas H. Waechter

Calendar, calendar.

Alan S. Lowe

Right.

Kevin J. Dennean - Citigroup Inc, Research Division

Will it be sampling or will it be generally available to customers for commercial?

Andrew Pollack

It depends on the qualification timeline of our customer. I mean, that is our plan be in production by the end of the calendar year.

Kevin J. Dennean - Citigroup Inc, Research Division

And as a module, I'm assuming it has the coherent DSP. And who's providing the DSP, and more importantly, the algorithms within that DSP? Because in my I understanding, correct me if I'm wrong, but that the coherent DSP is really the art within 100 gig in transmission?

Alan S. Lowe

Well, we think our optical components are the art. But I...

Kevin J. Dennean - Citigroup Inc, Research Division

I meant the secondary art.

Alan S. Lowe

The secondary art. I don't know we've really get into who our component suppliers are specifically. But you can ask the industry, there's only one guy.

Kevin J. Dennean - Citigroup Inc, Research Division

Well, let me try it a different way. I mean, is it proprietary JDSU algorithms running the DSP or it completely outsourced on that front also?

Alan S. Lowe

There's tons of firmware around the DSP as well as controlling all of the optical components. So the DSP itself comes from a supplier in Japan and we work with them very closely to make sure they're doing what they need to do and we're doing what we need to.

Kevin J. Dennean - Citigroup Inc, Research Division

And Dave, one for you. On taxes, I mean, obviously you have I think an NOL that goes well into the hundreds of millions. So you'd probably be only too happy to start paying taxes, because that would mean you've made a mountain of cash. But beyond North America business and maybe this is a question for the group, as you grow more internationally, what should we think about as far as cash taxes being paid?

David W. Vellequette

That's a great question. So down to $9 billion of NOL, so we're good for a while. We do have domestic and international NOLs, but I think the way to look at it, the way we have the business structured, most of the revenue comes through the U.S. Although we may be shipping somewhere else, the revenue recognition through the U.S. except for in David's business. So if you look at this business and say if his international mix is 50/50, as his business grows on about 40%, 80% of 1/5 is international we pay some taxes on. So we talk all typically about a $4 million to $5 million, $4 million to $6 million, kind of a million-dollar number, right? So that's why I use a dollar figure typically, because then I try to help you as I provide guidance on how we see that happening.

Kevin J. Dennean - Citigroup Inc, Research Division

So if we look out beyond the next 12 months and start thinking about a 2- or 3-year window, we shouldn't think of a major step up in cash, but taxes paid, maybe an incremental bump of a couple of million?

David W. Vellequette

You're looking at incremental bumps, however you model, David, and you'd say, okay, here's his model and half of that's international, 80% of that growth is going to have taxes on it. Here's what they're paying today, so be it. It's an equation.

Thomas H. Waechter

Okay, other questions? Okay. Thank you. So thank you.

David W. Vellequette

So now we've got a little bit of -- Tom's going to close.

Thomas H. Waechter

Let me get that for you, David. So just a few closing remarks. We feel very confident in the business, hopefully, that came through today. You could see the owners of the businesses, the core businesses, the adjacencies. We see really strong drivers out there in the market, probably stronger than we've ever seen, so that's a really, I think, good factor for our future. We're lining up the right products and solutions for those drivers. And we really believe that we're starting to separate, provide a pretty big gap between us and our competition in a number of areas, where we had some of those -- like in Alan's group where we had a couple of products that were out on market for 24 months before we ever had a competitor ship any product. Now we're continuing to look at those areas and keep growing our products, growing our product offering around the differentiated and collaborative types of innovative products. So we feel strong about that. There are some economic headwinds out there, Dave went through that. I think those are a bit unpredictable, but as we look out to the future, very confident in the overall drivers especially around our core business and how we're addressing those with some unique solutions, listening to our customers and provide them what they're looking for in a timely manner. I mean, PacketPortals a good example of a whole new area of exploration for us and more into the software model, what that means to our gross margins, our operating income, et cetera. I think it's going to be very significant as we look out into the future. I think most importantly, hopefully you got through the interaction with the team today, that there's a very strong commitment here, a dedication and real strong belief in our business going forward. And that's where really the part I'd like to leave you with today is that we really do have a leadership team here in the entire company that's very excited about our opportunities as we go forward and ready to execute against those business models that we put in front of you. With that, we have a cocktail hour, Miller time, right? So right outside the doors. Thanks everybody. We appreciate you joining us.

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